Evolution of Airline Revenue Management

Evolution of Airline Revenue Management

Airline revenue management is the process of maximizing the revenue generated from selling seats on flights. It involves forecasting demand, setting prices, and allocating seats to different customer segments and distribution channels.

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History of airline revenue management

The concept of airline revenue management emerged in the late 1970s when airlines faced increasing competition and deregulation. Airlines realized that they could increase their profits by charging different prices for different customers based on their willingness to pay and booking behavior. This practice is known as price discrimination or yield management.

One of the airline revenue management pioneers was American Airlines, which introduced a computerized reservation system (CRS) called Sabre in the 1970s. Sabre allowed American Airlines to track customer demand and adjust prices accordingly. Sabre also gave American Airlines an advantage over other airlines, as it could access more information about customers and flights.

Modern airline revenue management

Over the years, airline revenue management has become more sophisticated and complex as airlines face new challenges and opportunities. Some of the factors that influence airline revenue management today are:

  • The emergence of low-cost carriers (LCCs) that offer lower fares and fewer services, attracting price-sensitive customers and increasing price competition.
  • The growth of online travel agencies (OTAs) and metasearch engines that allow customers to compare prices and availability across multiple airlines and channels, reducing customer loyalty and increasing price transparency.
  • The development of new technologies and data sources that enable airlines to collect and analyze more information about customer preferences, behavior, and feedback, allowing for more personalized and dynamic pricing and marketing strategies.
  • The impact of external factors such as weather, fuel costs, regulations, security, and pandemics that affect demand and supply, requiring airlines to adapt quickly and flexibly.

To cope with these challenges and opportunities, airlines use various tools and techniques for airline revenue management, such as:

Segmentation: Dividing customers into different groups based on their characteristics, such as origin, destination, travel purpose, booking time, loyalty status, etc., and offering different prices and products for each segment.

Fencing: Creating rules or restrictions that prevent customers from buying lower-priced products that are intended for other segments, such as advance purchase requirements, minimum stay requirements, non-refundability, etc.

Overbooking: Selling more seats than the capacity of the aircraft, anticipating that some customers will not show up or cancel their bookings, and compensating those who are denied boarding with incentives or alternatives.

Revenue management systems (RMS): Revenue management system is software applications that use mathematical models and algorithms to forecast demand, optimize prices, and allocate seats across flights, segments, and channels.

Future of airline revenue management

Airline revenue management constantly evolves and innovates, as airlines seek to gain a competitive edge and meet customer expectations. Some of the trends and developments that are shaping the future of revenue management are:

Customer-centricity: Shifting from a product-centric approach to a customer-centric approach, where airlines offer more customized and personalized products and services based on customer needs, preferences, and value.

Ancillary revenue: Generating ancillary revenue from selling non-ticket products and services, such as baggage fees, seat selection fees, meals, entertainment, insurance, etc., either separately or bundled with the ticket.

Dynamic pricing: Adjusting prices in real-time based on changing demand and supply conditions, customer behavior, competitor actions, etc., using artificial intelligence (AI) and machine learning (ML).

Big data analytics: Leveraging large amounts of data from various sources, such as social media, web analytics, customer feedback surveys etc., to gain insights into customer behavior patterns, trends, preferences, etc., using advanced analytical techniques such as data mining, text mining, sentiment analysis, and more.

Blockchain: Using a decentralized ledger system that records transactions securely, transparently, and efficiently without intermediaries such as banks or OTAs, potentially reducing costs, improving trust, enhancing security, and facilitating loyalty programs.

Final thoughts

Airline revenue management is a vital function for airlines that can significantly impact their profitability, performance, and competitiveness. As the airline industry continues to evolve or face new opportunities and challenges, airline revenue management will also evolve and adapt to create value for both airlines and customers.