Revenue Management

Revenue management can be defined as the art of maximizing profit generated from a limited
capacity of a product over a finite horizon by selling each product to the right customer at the
right time for the right price. It encompasses practices such as price-discrimination and turning
down customers in anticipation of other, more profitable customers. Revenue management
originates from the airline industry, where deregulation of the fares in the 1970’s led to heavy
competition and the opportunities for revenue management schemes were acknowledged in an
early stage. The airline revenue management problem has received a lot of attention throughout
the years and continues to be of interest to this day.
An Arline typically, offers tickets for many origin-destination itineraries in various fare classes.
These fare classes not only include business and economy class, which are settled in separate
parts of the plane, but also include fare classes for which the difference in fares is explained by
different conditions for e.g. cancellation options overnight stay arrangements. Therefore the seats
on a flight are products which can be offered to different customer segments for different prices.
Since the tickets for a flight have to be sold before the plane takes off, the product is perishable
and revenue management can be applied. At the heart of airline revenue management lies the
seat inventory control problem. This problem concerns the allocation of the finite seat inventory
to the demand that occurs over time before the flight is scheduled to depart. The objective is to
find the right combination of passengers on the flights such that revenues are maximized. The
optimal allocation of the seat inventory then has to be translated into a booking control policy,
which determines whether or not to accept a booking request when it arrives. It is possible that at
a certain point in time it is more profitable to reject a booking request in order to be able to
accept a booking request of another passenger at a later point in time. Other important topics that
have received attention in the revenue management literature are demand forecasting,
overbooking and pricing. Demand forecasting is of critical importance in airline revenue
management because booking control policies make use of demand forecasts to determine the
optimal booking control strategy. If an airline uses poor demand estimates, this will result in a
booking control strategy which performs badly. Airlines often have to cope with no-shows,
cancellations and denied boarding’s. Therefore, in order to prevent a flight from taking off with
vacant seats, airlines tend to overbook a flight. This means that the airline books more
passengers on a flight than the capacity of the plane allows. The level of overbooking for each
type of passenger has been the topic of research for many years. Pricing is obviously very
important for the revenues of an airline company. In fact, price differentiation is the starting
point of the revenue management concept.
Revenue management assists in balancing between three types of costs.
 Spoilage cost
 Displacement cost
 Diversion cost
Airline currently use two components of revenue management.
 1. Differential Pricing
With a traditional approach airlines offer a wide range of fares with various sale conditions
and restrictions which each RBD and each cabin. In this case, the price is fixed and the main
task of revenue management is to maximise revenue by controlling capacity. It actually
means to allocate capacity among all the proposed fares.
•Market segments with “willingness to pay” for air travel
•Different “fare products” offered to business versus leisure travelers
•Prevent diversion by setting restrictions on lower fare products and limiting seats
available
• Increased revenues and higher load factors than any single fare strategy
• It allows the airline to increase total flight revenues with little impact on total
operating costs: Incremental revenue generated by discount fare passengers who
otherwise would not fly
• Incremental revenue from high fare passengers willing to pay more
• Studies have shown that most “traditional” high‐cost airlines could not cover total
operating costs by offering a single fare level
• Consumers can also benefit from differential pricing:
• Most notably, discount passengers who otherwise would not fly
• It is also conceivable that high fare passengers pay less and/or enjoy more
frequency given the presence of low fare passengers
• If airline could charge a different price for each customer based on their WTP, its
revenues would be close to the theoretical maximum
2. Yield Management (Low cost carrier method)
Most low-cost carries do not segment market on the basis of willingness to pay for air ticket with
different conditions and restrictions. Conversely they offer at any time a single price for one
product at each departure. This price is generally increasing with approaching departure. As
offered air tickets are one-way tickets, minimum stay at the destination or Saturday night rule
cannot be applied. On the other hand, tickets are non-refundable and ticket changes are either
completely prohibited or a subject to any administrative change fee. In this case, revenue
management main objective is therefore to maximize revenue through dynamic pricing, which
means managing price levels currently on sale.
• Main objective of YM is to protect seats for later‐booking, high‐fare business
passengers.
• YM involves tactical control of airline’s seat inventory:
– But too much emphasis on yield (revenue per RPM) can lead to overly
severe limits on low fares, and lower overall load factors
– Too many seats sold at lower fares will increase load factors but reduce
yield, adversely affective total revenues
• Revenue maximization is proper goal:
– Requires proper balance of load factor and yield
• Many airlines stop using yield management.
Revenue Management Techniques
Airline currently use three basic techniques for revenue management.
 Overbooking- Accept reservations in excess of aircraft capacity to overcome loss of
revenues due to passenger “no-show” effects.
 Fare Class Mix- Determine revenue-maximizing mix of seats available to each booking
(fare) class on each flight departure
 Traffic Flow Control (Network Optimization)- Further distinguish between seats
available to short-haul vs. long-haul (connecting) passengers, to maximize total network
revenue.

How Brand Image effects on Air fares pricing

Brands are an essential element of modern life, and have a strong impact on how products and
services are being perceived and valued. Brand equity has multiple opportunities to gain
potential customer and competitive marketing position with premium price.
Air transportation is a competitive industry, both domestically and internationally. The
competition among airlines offers travelers with more choices. While the fundamental product
provided by airlines in essence is similar to each other, which is to carry passengers and cargo
from origins to destinations, flights operated by different carriers do differentiate from each other
in terms of departure/arrival times, number of stops, aircraft types, etc. At the time of booking,
tangible differences in flights are presented to travelers, such as departure/arrival times, number
of connections, aircraft type and cabin classes. These visible advantages or disadvantages are
already priced in displayed airfares. Brand equity evaluate price premium, satisfaction/loyalty,
perceived quality, leadership, perceived value, brand personality, organizational associations,
brand awareness, market share and price, and distribution indices.
Pricing of flights is also determined by subjective and intangible factors such as traveller’s
preferences and perceptions of the airlines’ overall brand reputation. Such preferences and
perceptions could be from previous experience with the airline, or stem from brand equity of
airlines. A branded airline can use a premium price in the competitive market. Easily can
decrease competition with high price. After achieving brand equity, airline doesn’t have to invest
more on their distribution channels and promotional activities. They can lead a demanding value
and customer satisfaction with high price in worldwide.

Challenges to fix price standard in Airline industry

 High competitive market competition
 Lack of information about customer and competitor profile
 Underestimate market segments
 Rapidly changed customers demand
 High slot allocation and landing fees
 High airport and in-flight service demand
 Innovative plan design and continues trend with modern technology
 Global political issues (terrorist attacks)
 High safety and security cost
 Restricted “cabotage right”
 Uncontrolled distribution channels
 High promoting and staff training cost
 Sudden global pandemic (Covid-19)
 Costly carbon pricing for climate policy