Airline Revenue Management Strategy
Airline revenue management (RM) is the process of optimizing the revenue generated from selling seats on flights, taking into account factors such as demand, price sensitivity, competition, and customer behavior. Revenue Management has been a key competitive advantage for airlines since the 1970s, when they started to use dynamic pricing and inventory control techniques to segment customers and maximize their willingness to pay.
However, the airline industry has changed significantly since then, and so have the challenges and opportunities for revenue management. In this article post, we will discuss some of the current trends and best practices for airline RM strategy based on our experience and research in the field.
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The changing landscape of airline revenue management
The airline industry faces unprecedented uncertainty and volatility after the global COVID-19 pandemic, which disrupted travel demand and supply. Airlines have had to adapt their networks, schedules, pricing, and distribution strategies to cope with the changing market conditions and customer preferences. Some of the key factors that influence airline revenue management strategy in this context are:
Ancillary revenue
Airlines have increasingly diversified their revenue streams by offering ancillary products and services, such as checked baggage, seat selection, meals, Wi-Fi, lounge access, insurance, etc.
According to some reports, ancillary revenue can account for more than 50% of total airline revenue. Therefore, airlines need to optimize their total revenue by bundling and unbundling their offerings, creating personalized recommendations, and using dynamic pricing across all channels and touchpoints.
Customer data and analytics
Airlines have access to a wealth of customer data from various sources, such as booking systems, loyalty programs, social media, web analytics, etc. This data can be used to gain insights into customer behavior, preferences, needs, and willingness to pay.
Airlines can leverage advanced analytics tools and techniques like machine learning, artificial intelligence, and optimization algorithms to create predictive models supporting RM decision-making.
Digital transformation
Airlines have embraced digital transformation as a way to enhance their operational efficiency, customer experience, and innovation capabilities. Digital transformation involves adopting new technologies, processes, and organizational structures that enable airlines to be more agile, responsive, and customer-centric.
For example, airlines can use cloud computing, mobile applications, chatbots, blockchain, etc., to streamline their RM operations and improve their customer interactions.
Competitive dynamics
Airlines operate in a highly competitive and dynamic environment, where they face pressure from both traditional rivals and new entrants. Low-cost carriers (LCCs) have disrupted the industry by offering low fares and no-frills services, while ultra-low-cost carriers (ULCCs) have pushed the boundaries even further by charging for everything beyond a seat.
On the other hand, full-service carriers (FSCs) have tried to differentiate themselves by offering premium services and loyalty benefits. Airlines need to constantly monitor their competitive position and adjust their RM strategy accordingly.
The best practices for airline revenue management strategy
Given the changing landscape of airline revenue management, airlines need to adopt a holistic and agile approach to their RM strategy that aligns with their overall commercial objectives and customer value proposition. Some of the best practices for airline RM strategy are:
Align revenue management with other commercial functions
Revenue management cannot operate in isolation from other commercial functions, such as network planning, marketing, sales, distribution, etc. These functions need to collaborate and coordinate their actions to ensure a consistent and coherent strategy across all channels and markets.
For example, RM needs to align its pricing and inventory decisions with the network planning’s route selection and frequency allocation.
Segment customers based on value
Revenue management needs to segment customers based on their value to the airline, not just based on their fare class or booking channel. Value-based segmentation considers factors such as customer lifetime value (CLV), loyalty status, customer satisfaction (CSAT), ancillary spending potential (ASP), etc. Value-based segmentation allows airlines to tailor their offerings and pricing to different customer segments based on their needs and preferences.
One of the key aspects of this is to understand your customers’ willingness to pay for different products and services. By segmenting your customers based on various criteria, such as travel purpose, booking behavior, loyalty status, preferences, etc., you can create more personalized and targeted offers that match their needs and expectations.
For example, you can offer different fare classes, ancillary services, bundles, discounts, or loyalty rewards to different customer segments. You can also use dynamic pricing techniques to adjust your prices according to demand and customer value.
Leveraging dynamic pricing
Dynamic pricing is the practice of adjusting prices in real time based on demand and supply conditions, competition actions, customer behavior, etc. Dynamic pricing enables airlines to capture more revenue opportunities by exploiting price elasticity, demand fluctuations, market segmentation, etc.
Dynamic pricing requires sophisticated analytical capabilities and systems that can process large amounts of data and generate optimal prices quickly and accurately.
Monitor your competitors and market trends
Another important revenue management factor is keeping an eye on your competitors and the external environment. By monitoring your competitors’ prices, products, capacity, routes, promotions, etc., you can identify opportunities and threats in the market and adjust your strategy accordingly.
You can also use market intelligence tools to track customer feedback, sentiment, preferences, trends, etc., across various channels and platforms. This can help you understand the customer journey and pain points and improve your customer experience and satisfaction.
Leverage data and analytics
As mentioned earlier, data and analytics are essential for revenue management as they provide insights into customer behavior, demand patterns, price elasticity, revenue performance, etc. By collecting and analyzing data from various sources, such as booking systems, CRM systems, web analytics, social media, etc., you can generate actionable insights that can help you optimize your RM decisions.
You can also use advanced analytics techniques like machine learning, artificial intelligence, or optimization algorithms to automate and enhance your RM processes. For example, you can use predictive analytics to forecast demand and price sensitivity, prescriptive analytics to recommend optimal prices and inventory levels, or descriptive analytics to monitor and evaluate your RM outcomes.
Experiment and innovate
Finally, revenue management is not a static process but a dynamic one that requires constant experimentation and innovation. By testing different RM strategies and tactics, such as new products, prices, promotions, channels, etc., you can learn from your results and improve your revenue management performance.
You can also use innovative techniques, such as design thinking or agile methodology, to create new solutions that address customer needs and expectations. For example, you can use design thinking to empathize with your customers and ideate new value propositions or agile methodology to deliver fast and iterative prototypes that can be validated with real customers.
Conclusion
Airline revenue management is a challenging but rewarding process that can help airlines maximize their revenue potential and gain a competitive edge in the market. You can improve your revenue management effectiveness and efficiency by following some of the best practices for the airline revenue management strategy discussed in this article.
