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Maximizing Revenue with a Leg Revenue Management System

Maximizing Revenue with a Leg Revenue Management System. E. Andrew Boyd Vice President, Research and Design PROS Revenue Management. Revenue Management Goal. To achieve the goal of increased revenues, the value of each ticket sold must be known with some certainty.

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Maximizing Revenue with a Leg Revenue Management System

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  1. Maximizing Revenuewith aLeg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Management

  2. Revenue Management Goal • To achieve the goal of increased revenues, the value of each ticket sold must be known with some certainty Generate increased revenues by seeking to accept the highest paying mix of passengers

  3. A Perfect World • One flight leg • One fare per booking class • Y = 800 • M = 600 • B = 500 • Q = 350

  4. Perfect Fares Fare 1000 800 800 600 600 500 400 350 200 Class Y M B Q

  5. Fares in Reality Fare 1000 800 600 FareRange 400 200 Class Y M B Q

  6. Where Does Fare Variation Come From? Source 1: Distribution Channel

  7. Where Does Fare Variation Come From? • Source 1: Distribution Channel Y class tickets on flight 111 may sell for different fares because of distribution channel Alliances TravelAgencies Code ShareArrangements Inventory Internet Sales TourOperators InternetAuction CorporateAccounts FrequentFlier Programs

  8. Distribution Channels:Front End or Back End Fare Control? • Front End Fare Control • Make sure fares align across distribution channels when they are established • Back End Fare Control • Assume fares will not be aligned, and account for differences when a purchase request arrives Front End Back End

  9. Front End Fare Control • Good front end control is extremely difficult to achieve, but is the only alternative for carriers in a non-seamless / leg environment • How to assure that all Y class tickets on flight 111 sell for approximately the same price?

  10. Back End Fare Control • Seamless availability / O&D provides the opportunity to address many distribution channel issues from the back end • Dynamic fare calculation at time of request:assigning the right fare to each transaction

  11. The Value of Back End Fare Control Quality of Front End Fare Alignment • The worse fair alignment is on the front end, the greater the impact of back end fare control • Back end fair control can have a major revenue impact % Below Upper Bound

  12. Where Does Fare Variation Come From? Source 2: Leg Control

  13. Where Does Fare Variation Come From? • Source 2: Leg Control Fares are provided at the O&D level, but availability is controlled at the leg fare class level • Flight networks greatly complicate the process of defining leg fare class fares

  14. Leg Control Fare Variation:The Problem • Example Y class fares on a simple network 800 STL ELP IAH 400 MSY 700

  15. Leg Control Fare Variation:The Problem • Y fare tickets on the leg ELP-IAH take on the values 400, 700, and 800 – a wide fare variation Should these fares all be assigned to Y class? Should these fares be reassigned to differentclasses that reduce the fare variation?

  16. Leg Control Fare Variation:The Problem • Fare class realignment may be required Reassign to M Class 800 STL ELP IAH 400 MSY 700 Reassign to B Class Leave in Y Class

  17. Fare Class Rationalization • Very Important Fact: Fares throughout the network must be aligned within fare classes if leg control revenue management systems are to function properly • How can this be achieved?

  18. Network Optimizationfor Fare Class Rationalization • Assign O&D fares to fare classes so that a leg control revenue management system generates maximum revenue • Determine leg fare class fares for leg optimization algorithms • Adhere to all business constraints

  19. Observations • The myriad of business constraints leads to an extremely challenging problem that is not easily handled by an optimization algorithm alone • If fare class rationalization is not addressed, even a good leg revenue management system can be severely compromised • Fare class rationalization is an important aspect of aligning fare classes within an alliance

  20. Fare Class Rationalization:The Wrong Way • Ordering O&D values from highest to lowest fare value and clustering to form fare classes is a poor idea

  21. Fare Class Rationalization:The Right Way • O&D valuation should incorporate some measure of displacement cost • Good leg fare class fares must be determined

  22. A Process For Fare Class Rationalization: Getting to Leg Class Fares • Important Fact: There are mathematically based ways to prorate itinerary fares into leg fares; itinerary fares can then be treated as consisting of leg fares for purposes of fare class rationalization 800 200 600 A True Proration 800 300 700 A Pseudo-Proration

  23. A Process For Fare Class Rationalization: Getting to Leg Class Fares • With fares prorated to legs, it is possible to determine good leg fare class fares by taking a weighted average of the prorated fares within the fare class • Prorated fares still have the likely problem of being poorly rationalized at the leg level

  24. A Process For Fare Class Rationalization: Getting to Leg Class Fares • Proration alone does not solve the problem of fare class rationalization • Itineraries ELP-IAH and ELP-IAH-MSY align well onleg ELP-IAH-MSY, while itinerary ELP-IAH-STLdoes not

  25. A Process For Fare Class Rationalization: Getting to Leg Class Fares • Proration does suggest how fare class rationalization might be achieved • Y Class: ELP-IAH and ELP-IAH-MSY • M Class: ELP-IAH-STL

  26. A Process For Fare Class Rationalization: Getting to Leg Class Fares • The problem with rationalizing fare classes on one leg is that the rationalization may not make sense for other legs

  27. A Process For Fare Class Rationalization:Pseudofares • Pseudofares are one method of prorating itinerary fares to leg fares Pseudofarek(l1,l2,…,lk,…,lm) = Fare(l1,l2,…,lk,…,lm) – Displacement Cost (l1,l2,…,lk,…,lm) + Displacement Cost (lk)

  28. A Process For Fare Class Rationalization:Pseudofare Example 800 – 600 + 100 800 – 600 + 500 800 700 300 100 500 Displacement Costs

  29. A Process For Fare Class Rationalization • Pseudofares provide a good alternative for performing fare class rationalization at the leg level

  30. A Process For Fare Class Rationalization • Important Fact:Pseudofares have the special property that they preserve order under fare proration to different legs • This special property of pseudofares makes them ideal for the purpose of fare class rationalization

  31. Ultimate Fare Class Rationalization • Fare class rationalization is a front end fare control solution • Seeks to align fares so that the allocation of inventory through leg fare class limits yields revenue maximizing decisions • Can leg fare classes ever be fully rationalized? • Is it possible to achieve a perfect world in which every ticket sold in a leg class has the same fare?

  32. Ultimate Fare Class Rationalization • The Bad News • Restricting inventory control to availability in leg fare classes, the answer is no;a perfect world cannot be achieved • Fare class rationalization is necessary to get the most from a leg control system, but there are inherent limitations

  33. Ultimate Fare Class Rationalization • The Good News • Stepping outside of leg fare class control to O&D control, a perfect world can be achieved • Leg level Displacement Adjusted Virtual Nesting, for example, is the obvious and inevitable resolution of the problem of trying to rationalize fare classes • Fare class rationalization is simply thrown out the window and replaced by leg value buckets • Bid price methods achieve the same goal in a more sophisticated fashion

  34. Conclusions: Distribution Channel • Fare variation as a result of different fares in different distribution channels is a huge problem that must be addressed • The move to seamless availability / O&D control opens up substantial opportunities for revenue improvement through back end inventory control • Without seamless availability / O&D control, airlines must be diligent in aligning fares onthe front end

  35. Conclusions: Leg Control • In a leg control environment, it is vital to have fare classes rationalized at the network level in order to achieve maximum revenue gains from a leg control revenue management system • Good fare class rationalization is difficult and has inherent limitations • O&D control overcomes the limitations inherent in a leg control revenue management system

  36. Maximizing Revenuewith aLeg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Management

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