Synopsis

Revenue Management System In Airline Industry

Submitted in partial fulfillment of the requirements for qualifying MBA

Supervised By

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NAME: xxxxxxx ENROLLMENT NO: xxxxxxxxxxx Study Centre: xxxxxxxxxxxxxx Regional centre: xxxxxxxxxxx

IN IRA !AN "I NATIONAL O#EN $NI%ERSIT&

Sc'ool o( Computer ) In(ormation Sciences

Revenue Management System In Airline Industry

Under Supervision of : xxxxxxxxxxx

Submitted By: Name Address Phone No Programme Code Enrollment No Name of the Study Centre Study Centre Code : : : : : : : xxxxxxxxxxx xxxxxxxxxx xxxxxxxxxx xxxxxxxxxx xxxxxxxxxx xxxxxxxxxx xxxxxxxxxx

Revenue Management System In Airline Industry

1 "itle of the pro#e$t ! %ntrodu$tion to topi$ & 'b#e$e$ti(e of the pro#e$t ) *esear$h Methodology + ,iterature re(ie. ,imitations / Bibliography

&

Revenue Management System In Airline Industry

! %N"*'01C"%'N

"his is a Pro#e$t -or2 underta2en

in $ontext of partial fulfillment of the MBA in

3inan$e *e(enue Management -as in(ented by 1 S airlines in the 14567s in response to a ne-ly deregulated industry and to the in$reased $ompetition that -as $reated Sin$e then8 it has been adopted by a (ariety of industries8 and the list is $onstantly gro-ing But the basi$ $on$epts ha(e been around for quite a long time %t -as de(eloped by the airlines to impro(e re(enue performan$e in the fa$e of in$reasing $ompetition %t -as ob(ious to the airlines that passengers $ould be di(ided into t-o broad $ategories8 based on their tra(el beha(ior and their sensiti(ity to pri$es "here business and leisure tra(elers Business passengers tended to ma2e their tra(el arrangements $lose to their departure date and stay at their destination for only a short time "here -as usually little flexibility in their plans8 and they -ere -illing to pay higher pri$es for ti$2ets ,eisure tra(elers8 on the other hand8 boo2ed their flights -ell in ad(an$e of their tra(el date "hey stayed longer at their destinations and had mu$h more flexibility in their plans "hey -ould often de$ide not to tra(el rather than pay high fares8 and flights often departed -ith empty seats "he $hallenge to the inno(ators of re(enue management -as to de(ise a plan that -ould ma2e the empty seats at the lo-er fare -hile pre(enting passengers -ho -ere -illing to pay the higher fare from buying lo-9fare seats Sin$e lo-9fare passengers typi$ally boo2 in before higher fare $ustomers8 the re(enue management system must fore$ast homany business passengers -ill -ant to boo2 on a flight "hen it must set aside or prote$t these seats so that they -ill be a(ailable -hen the business passengers request them *e(enue Management is the pro$ess of analysing and fore$asting $onsumer demand in order to optimi:e in(entory and pri$ing le(els to maximi:e profitability

3ig 1 Pro$ess of *M %n other -ords8 to $onstantly analyse and fore$ast the remaining demand for a $ertain future produ$t or e(ent and subsequently ad#usting the pri$ing le(els in order to sell the rig't product at the rig't price to the rig't customer at the rig't time to maximi:e profitability %t is important to note that *e(enue Management addresses the re(enue side of the equitation8 not the $ost side "here exists an in(erse proportionality bet-een ,oad 3a$tor ;1nits Sold< and A(erage =ield ;1nit *e(enue< and *e(enue Management -ill thus find the optimum balan$e bet-een these fa$tors in order to maximise *e(enue or %n$ome

& 'B>EC"%?E '3 "@E S"10=:9

Revenue Management O*+ectives

Produ$e a demand fore$ast based on mar2et data8 $ommer$ial ob#e$ti(es8 and $alendar9related e(ents Ad#ust demand fore$asts based on en(ironmental $hanges8 management guidelines8 and performan$e metri$s Set up and manage an allo$ation strategy using the re(enue management system tools in a systemati$ and effi$ient manner Prioriti:e administrati(e tas2s

,- RESEARC" MET"O OLO!&

Researc' Met'odology
"his resear$h is Analyti$al -ith qualitati(e approa$h %n Analyti$al resear$h8 the resear$her has to use fa$ts or information already a(ailable8 and analy:e these to ma2e a $riti$al e(aluation of the material So8 here in this pro#e$t % ha(e $olle$ted data8 mainly from the se$ondary sour$es %n primary sour$e8 % ha(e tal2ed to one *e(enue Management expert8 Mr Suresh Menon8 'ffi$ial of *e(enue Management "raining group8 in >et Air-ays Based on the information from Mr Suresh and (arious se$ondary sour$es8 % go through the re(enue management s$enario -orld-ide and able to analy:e its $urrent and futuristi$ trends Also find ne- *e(enue Management Strategies and $hallenges and to some extent try to predi$t future of the *e(enue Management based on the industry experts (ie-s the basis of data $olle$ted from the primary and se$ondary Sour$es the Aey Areas of *e(enue Management are 1< .orecasting3ore$asting is an important $omponent of planning in any enterpriseB but it is parti$ularly $riti$al in airline re(enue management be$ause of the dire$t influen$e fore$asts ha(e on the boo2ing limits that determine airline profits 3ore$asting for airline re(enue management system is inherently diffi$ult Competiti(e a$tions8 seasonal fa$tors8 the e$onomi$ en(ironment8 and the $onstant fare $hanges are a feof the hurdles that must be o(er$ome %n addition8 the fa$t that most of the histori$al data is $ensored further $ompli$ates the problem

!< #ricingPri$ing has been around as long as people ha(e traded Pri$ing of produ$t or ser(i$es represents the 2no-ledge and understanding of their produ$t and ultimately determines the gro-th prospe$tus of the organi:ation %f produ$t and Cor ser(i$e is not ex$lusi(e or not pro(iding the desired satisfa$tion to the $ustomer or unable to gi(e

(alue for money8 -ill not su$$eed 'n the other hand if produ$t andCor ser(i$e has high le(el of $ustomer satisfa$tion and high manufa$turing Coperating $osts it -ill lead to in$rease in the time period of rea$hing its brea2 e(en point and loss of re(enue "hus pri$e is to be determined in su$h a -ay that firm $an reap the profit of in$rease in demand and let $ustomers to ta2e the ad(antage of a(ailability of produ$t andCor ser(i$e

/0Seat Inventory Control %n(entory $ontrol system basi$ally means the pro$edure by -hi$h the produ$t or the finished $ommodity is being $ontrolled in the mar2et "he system depends upon the $ommodity that is being offered by the produ$er8 if the $ommodity is perishable the in(entory system is different from that of for durable goods But -hen -e tal2 about ser(i$e industry -e don7t thin2 of a $ommodity rather -e thin2 of a ser(i$e8 for e g li2e in A(iation industry "hey don7t offer a tangible $ommodity rather they offer a produ$t -hi$h $an be experien$e but $anDt be tou$hed or felt As -e tal2 about 3MCE mar2et -e get a tangible $ommodity in hand but -hen -e $ompare it -ith A(iation se$tor -e get an intangible $ommodity in terms of experien$e

,0Over*oo1ing

"he tra(el industries in parti$ular are plagued by the problem of Fno9

sho-sG H people -ho boo2 in(entory and then do not sho- up to use it ;or pay for it< "he atta$hments of $an$ellation penalties to airline dis$ount fares are attempts to mitigate this problem8 -hi$h ha(e met -ith some su$$ess "o $ompensate for no9sho-s8 tra(el firms Fo(erboo2G their $apa$ity8 trading off the possibility of empty units if they don7t o(erboo2 enough against the ill -ill and out9of9po$2et $ompensation to $ustomers that o$$urs -hen $ustomers are FbumpedG ;airlines<

+ LITRAT$RE RE%IE2: avis M 344,5 Iyield management te$hniques are reportedly quite (aluable 'n an estimate Ameri$an airline made an extra J+66 million per year based on its yield management te$hniques7 A$$ording to an estimate the pri$ing system used by Ameri$an airlines $hange the pri$es more then half a million per day enec1ere and McA(ee 34465 I*e(enue management te$hniques pro(ide tools to use $onsumer surplus through dynami$ pri$ing7 Ne(ertheless there is little doubt that dynami$ pri$e dis$rimination is e$onomi$ally important "he pri$ing system by most ma#or airlines is opaque to the $ustomer "he only thigh -hi$h $ustomer $ame to 2noabout the airline is the quality of ser(i$e By applying the dynami$ pri$ing te$hniques and by pro(iding best ser(i$es to the $ustomer8 airlines $an in$rease the re(enue and also the loyalty of the $ustomer to the brand !erag'ty5 7evin 899,5 I*e(enue management offered us a -ay to $apture re(enues that -ere being left on the table *e(enue management implements the basi$ prin$iple of supply and demand e$onomi$s in a ta$ti$al -ay to generate in$remental re(enues 7 Airlines monitor through the use of spe$iali:ed soft-are ho- seats are being reser(ed and rea$t a$$ordingly8 for example by offering dis$ounts -hen it appears as if seats -ill other-ise be (a$ant 0uring pea2 season airline $harge the passenger as mu$h as they $an and offer produ$ts to those -ho are -illing to pay more -hile in lean season (arious mar2eting te$hniques li2e free $ompanion s$heme8 dis$ounted one -ay fares8 returned fares8 ex$ursion fares and bas2et s$heme et$ are being offered by airline a$$ording to their mar2eting model

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Andy :oyd5899/8I'ne9-ay airlines segregate $ustomers is by imposing ad(an$e pur$hase requirements and Saturday night stays for $heap ti$2ets "hese restri$tions a$t as KKgatesDD that separate pri$e9sensiti(e leisure tra(elers from time9sensiti(e business tra(elers "he $hallenge for other industries is to find the right gates7 "he sensiti(ity of demand $an be $ontrolled to some extent if an airline has a good no of loyal $ustomers and an ability to attra$t ne- $ustomers e(en at the time of lo- demand Sengupta A589968IAirlines that use re(enue management periodi$ally re(ietransa$tions for ser(i$es already supplied and for ser(i$es that are to be supplied in future "hey may re(ie- information su$h as past statisti$s8 up $oming e(ents li2e sports8 holidays8 festi(al or unexpe$ted past e(ents su$h as terrorist atta$2s and other information S1C@ as $ompetiti(e information ;in$luding pri$es<8 seasonal patterns8 and other pertinent fa$tors that affe$t sales 7 "he su$$ess of an airline depends upon the $apability of the air line to fore$ast the future and deploy the maximum $apa$ity on the routes -ith $omparati(ely high demand but by ta2ing the $ost of operation into $onsideration :elo*a*a 899/5 IAirline -ho is busy in maintaining its load fa$tors by de$reasing its fare -ith analy:ing that it $an harm its future poli$ies "hese airlines are more sus$eptible to go out of the pi$ture G *e(enue management system pro(ides enables airlines to satisfy $ustomer and made profits to the greater possible extent -ithout any lose of image

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6- .uture o( Revenue Management

Lhat -ill dri(e the future of *MM Pri$ing transparen$y Computing po-er and database manipulation 1nderstanding of $onsumer beha(ior ;espe$ially -eb analyti$s< Consumer toleran$e for being I*M7d7

Pri$ing transparen$y has gro-n qui$2ly o(er the past se(eral years 3rom the days -hen pri$ing -as transparent only to the tra(el agent8 to the ad(ent of online agen$ies li2e Expedia8 "ra(elo$ity and 'rbit:8 to the $reation of information $onduits8 li2e Aaya2 and Side2i$2 Su$h transparen$y has made the other airline7s selling pri$e mu$h more rele(ant to the determination of my optimal selling pri$e8 su$h that *M systems -ill need to get mu$h better at 2no-ing the $ompetition7s pri$e and in$orporating it into the $al$ulation of future demand and the elasti$ity of demand % expe$t that airlines -ill figure this out8 gradually8 o(er the next ten years Computing po-er -ill ma2e the in$orporation of $ompetiti(e pri$es (iable %t -ill also enable more tailored offerings ;su$h as genuine one9to9one pri$ing<8 as airlines learn hoto use -hat they 2no- about a $ustomer to alter the offering

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