Unbundling, which means charging their passengers separately for services such as baggage handling and meals, is a vitally important source of revenue for modern airlines. According to the annual Amadeus Review of Ancillary Revenue Results, airlines produced US$22.6 billion in ancillary revenues in 2011. And Amadeus predicts that the figure will increase to US$36 billion in 2012. However, the added difficulty of keeping track of all the unbundled prices requires ever more sophisticated algorithms.
Alex Dietz, principal industry consultant for the SAS Hospitality and Travel practice, said: “Revenue management used to be relatively straightforward. It was not rocket science and it could be misunderstood by very few people, but now it’s more complex because the airlines distribute so many separate products and there are so many different ways to sell them.”
Dietz says unbundling is the biggest change to the airline revenue management world since the arrival of the low-cost airlines. “Airlines used to sell just airline seats, which came with baggage handling and a meal, your allocated seat, and other stuff. But now it doesn’t – or then again it may with some airlines! Managing revenue when the product side is no longer consistent requires far more complex software responses. It’s good for the customer to have more choices, but the more choices they get, the harder it becomes to predict their behaviour and revenue management is all about predicting behaviour.”
The process of revenue management may have become more convoluted, but the process is still an obligatory tool for a major airline, according to Darren Rickey, the vice president of solutions management for Sabre AirVision, one of the major global providers of fully integrated commercial planning solutions. “As a rule of thumb, any airline with more than 50 flights per day needs an automated system to detect and react to changes in the marketplace,” Rickey said.
Each airline now has a complex computer system that uses algorithms to maximise profit based on as many as two dozen different fares for a single flight. Ricky estimates that a well-calibrated system manages around 80 percent of upcoming flights, with ‘exceptions’ managed by the airline’s analysts.
But Dietz at SAS Hospitality and Travel says the current management systems are far from perfectly adapted to the purpose of managing revenue because of the sheer complexity of the pricing strategies. “There’s no gold standard and when I go to revenue management conferences, there’s a lot more debate now than there used to be. Scientists know they have a problem, but no one has figured out how to solve it in a way that is clearly achievable,” he said.
One of the major issues is that customers often buy a ticket through one distribution agent – usually an online travel agency (OTA) – but then have to go somewhere else to purchase all the unbundled services they want. Not only is this annoying for the customer, but it makes revenue management much trickier.
The problem occurs because the Global Distribution Systems (GDS) have not been able to keep up with the rapid changes in the airline industry’s unbundling strategies. As quickly as GDS companies have found solutions to handle new approaches, the airlines have changed direction in their constant quest for new ancillary revenue streams.
American Airlines recently announced a new ticketing strategy, which attempts to solve some of these problems. Their approach is to re-bundle previously unbundled services. A new fare structure places explicit charges on the tickets, rather than forcing customers to pay for the extra services as add-ons. The airline calls its main new options ‘Choice’, ‘Choice Essential’ and ‘Choice Plus’.
Dietz observes that this will make revenue management slightly easier because allowing previously unbundled services to be bought at the time as a ticket means American Airlines can include those revenues when segmenting travellers and determining fare availability.
“They have said they will make all these things available to travel agencies and OTAs, but they are telling the OTAs that they have to meet them half way. They are saying ‘we will put it out in this format, but you have to figure out how to use it’. There will be teething problems, but I think this will become a big trend in the industry,” he says.
Umit Cholak, the director of revenue management at Amadeus, another major global provider, agrees with Dietz that no optimal revenue management system yet exists. “Even the most sophisticated system is not the optimal one because that would require so many resources and so much complexity in the technology and no one has invested enough in it,” he notes.
Amadeus has still spent US$2.4 billion since 2004 on developing its revenue management systems. The software is expensive to upgrade and it’s also a hugely complex and time-consuming process. One of the problems is that the TPF assembly languages have been used in the airline industry since IBM introduced them in the late 1950s. Later programs, such as java and CE0 plus, introduced more flexibility and productivity into designing systems, but they were not available in TPF.
“The huge financial investment helps, but understanding how to untangle the mess is just as important as putting money into it,” Cholak says. “It’s a huge project to rewrite all of it, so the best way is to focus on rewriting a small portion, but to make sure that the entire system still works as a whole. It’s also not a single project. In my area alone, which is inventory and revenue management, we have about 400 people working on it. They are about 95 percent system designers, either product definition people, or developers. There’s also a small percentage involved in product marketing and product management.”
For larger airlines, it is not enough to provide standalone systems because of the far greater intricacy of operations. Cholak says they have much broader customer bases and more varied sources of revenue than smaller airlines. Whereas low-cost airlines fly direct to a restricted number of destinations, the larger airlines need to calculate the “network effects” caused by connecting flights. Delta Air Lines, for example, has to take into account about 600 million potential routes.
Preparing bespoke solutions for larger airlines can take time. Amadeus’ designers recently signed a large contract to deliver a personalised system for one of its customers within the next 18 months. But it is worth the wait for the bigger airlines. An effective revenue management system can make a huge financial difference. One of Amadeus’ clients is the US$18 billion dollar company Air France-KLM. If the Amadeus system increases revenue by 1 percent, it adds US$180 million dollars onto the company’s bottom line.
The system providers face an unenviable task as the complexity that needs to be modelled is increasing all the time. Rapidly emerging trends mean software providers have to keep evolving. The advent of ‘opaque channels’ – where customers can book a flight without knowing the airline they will fly with – gives more choice to the consumer; mobile technology is increasingly used to buy tickets online; Google and Facebook will inevitably become distributors and sellers of airline tickets.
The labyrinthine new era of revenue management demands a matching complexity of data. Sabre, for example, places the acquisition of data at the forefront of the innovations for its Sabre AirVision Revenue Manager program.
Darren Rickey, Sabre’s vice president of solutions management, says: “We are focusing on bringing together data from across the commercial planning landscape. That includes sales, fares, schedules and competitive data. The extent of the data gives management analysts a clearer viewpoint of changes in the marketplace. Historically, departments within a commercial planning structure at airlines used their own isolated data sets, and Sabre is bringing it together so decisions on market tactics can be made with one dataset, meaning ‘one single version of the truth’.”
Rickey says there are three key areas of Sabre’s innovations in data gathering. The first is the incorporation of ancillary revenue data into the total value of a passenger when they travel. “This is a key innovation as currently all revenue management systems optimise using just the fare values that a customer books. Sabre intends to track, forecast and optimise ancillary sales to allow airlines to manage their total revenue uplift, given the extraordinary increase in ancillary sales in the past five years,” he observes.
The second focus is the incorporation of real-time booking and ticket data so the solution has improved ‘sense and respond’ capabilities when sales and bookings change throughout the day. “To give an example, when sales promotions occur, it is important to tell the revenue management system and analysts the penetration of the promotion and stimulation it has had on the target markets,” says Ricky.
Finally, there is a new focus on customer-centricity, which allows more detailed segmentation of the market. This customer-centricity is becoming a trend right across the industry, according to Sébastien Touraine, manager of e-services at the International Air Transport Association (IATA).
“The most advanced modern management systems are gradually becoming more customer-centric,” he says. “They can almost personalise their offers now because there is more and more data available. In the e-commerce world they get information about their customers’ preferences from cookies, the flight-to-book ratios and many other sources.”
Cholak at Amadeus reveals that the company has spent most of its US$2.4 billion investment on creating something ‘scalable’, meaning a system that can handle a growing amount of work.
“We provide sophisticated functionality which performs at a very high level, but which must be scalable very quickly. The question comes in – do I have a seat and what’s the price? And we have about 16,000 CPUs answering the question in real time in our data centre,” he concludes.