John Strickland makes sense of the complex ways airlines try to maximise their income.
A better understanding of what airlines call “revenue management” may be helpful to travellers who regularly buy their own tickets. Airline profitability is fragile, so at the very least a well-managed airline will ensure that capacity is not wasted. It does this by filling flights as full as possible (passenger load factor), and by maximising revenues for each seat sold. So airlines employ teams of revenue management analysts who pore over data and trends supported by more and more automation and sophisticated forecasting tools. Even in the industry it is not fully understood, and some see it as as a dark art. But why is it so complex?
SUPPLY AND DEMAND
How many passengers end up travelling on a flight and at what price, will vary according to numerous factors. Some of these are regular and predictable, others are more of a one-off or random nature. The time of the day, day of week, time of year, sporting events, holiday periods and changes in competition all have an effect on demand. More random factors such as strikes, weather conditions, terror attacks and changes in the economic outlook are much harder to forecast. On top of these market influences, the actual mix of customers on a flight varies significantly. There will be variation between higher and lower fares sold, and – especially on long-haul services – between cabins. This variety of fares paid will vary significantly, making a dramatic difference to the final revenue earned. In other words, even when full and with the same aircraft type and capacity, profitability can vary significantly from one flight to another. More generally, leisure customers typically book earlier and pay less, while business travellers tend to book later and pay more. Except even this generalisation is becoming less true.
BUT NOW, OR BUY LATER?
Airlines don’t want to sell out too early or too cheaply, only to find they could have sold last-minute seats at more handsome margins. Equally, they don’t want to hold out for more lucrative higher-fare customers who don’t materialise, and lose those who would have bought lower fares to their competitors. Rigid physical cabin divisions are not easy to alter, but other adjustments can be made – according to insights gained from data – to optimise revenue and passenger load factor. Airlines have the option to allocate a fixed or flexible amount of seats to each price.
Complexity goes beyond these factors. Especially now, airlines also have to consider what currency a ticket is being sold in since volatile exchange rates play havoc with projected revenues, and so one market may be favoured over another.
The cost of “producing” a seat is another variable. In the past any seat sold for a price that exceeded direct passenger-related costs such as catering, airport handling and ticket taxes was seen as valuable; at least it contributed towards overheads. Today with the growing importance of ancillary (non-ticket) revenues, that dynamic is changing. There may be occasions when, much like supermarket price deals, seats may be sold as a loss leader if this is compensated by sufficient gains on other purchases from, for example, baggage fees, speedy boarding and car rentals. Ryanair earns more than 20 per cent of its revenues from these other sources.
UPSELLING
In an environment where there’s downward pressure on pricing, mechanisms that generate more revenues on top of the ticket price and achieving “upsell” to various extras, or even “trade up” to another cabin, make all the difference to profitability.
As AI advances and big data becomes more accessible, airlines are learning more about individual customer behaviour and preferences, so over time this will allow a more personalised approach to pricing. Airlines should find it easier to sell seats profitably, while more customers should find their ideal price more often. Given the concern we all have about how our personal data is being used, maybe airlines should be a little less coy about their revenue management activities, given the benefits to customers as well as to themselves. Less of a dark art, more of a necessity.
John Strickland is director of JLS Consulting
