eBook - Practical Revenue Management in Passenger Transportation - Content outline

MODULE ONE - INTRODUCTION TO REVENUE MANAGEMENT

What is revenue management and why is it needed in the passenger transportation industry of today and tomorrow? Revenue management first appeared in the carrier industry starting in the early 1980s. It arose from the need for accurate demand estimates and resource allocations in the newly deregulated environment. Therefore we begin this book and this module with a look back at the main causes and consequences of carrier deregulation which started in North America. The second section is an introduction to the basics of revenue management and will serve as a foundation for the rest of the modules in this course. In the final section we look to the future and consider how the internet is changing ticket distribution and some of the challenges and opportunities that it has created.

MODULE TWO - MANAGING VARIABLE DEMAND FOR TRAVEL

Revenue management in the passenger transportation industry involves managing demand for seats. To manage demand effectively and efficiently, it is important to understand and anticipate the effects of market forces on potential demand. A high level of analysis and preparation will allow you to better address the effects of forces outside of your control and ensure that the decisions you make are based on insight and fully support business objectives.

In this module we begin by looking at the characteristics of passenger demand for travel and discuss a number of factors that influence that demand. The second section focuses on different demand strategies. This includes basic steps you can take to reduce or increase demand and the consequences of maintaining the status quo. The final section is on forecasting demand. We discuss the importance of forecasting demand accurately, the methods used in forecasting, as well as the roles of the revenue analyst, computerised revenue management systems, and effective business processes.

MODULE THREE – PASSENGER TRANSPORTATION PRICING

All the seats in the coach compartment look the same, yet there are many different prices for those seats. Because of the fluctuations in passenger demand for travel, their perishable inventory, and relatively fixed seating capacity, carriers have adopted a variable pricing strategy. This strategy targets different market segments in order to control demand and maximise revenues. Underlying this strategy is the price-demand relationship. In module 2 we considered the demand side of the equation. Now we have the opportunity to look at pricing in more detail.

What costs do carriers consider when determining ticket prices? In the first section we look at both carrier and customer costs and explain the difference between fixed and variable carrier costs. Why did I pay more for my ticket than the person sitting next to me? The second section revisits the foundation of the carriers’ differential pricing strategy, the price-demand relationship. This helps us to better understand variable pricing and market segmentation, the role of fare rules, and the goals and processes of inventory, or revenue, management. How do carriers set prices? In the third section we outline various pricing strategies that carriers use when setting prices.

MODULE FOUR - BOOKING CLASS ASSIGNMENT

With variable pricing, a single seat in a compartment can be sold to different customers at different prices. As we’ve seen, a particular set of rules and restrictions are associated with each fare product to ensure that it can only be purchased by the market segment that it targets. How many seats should a carrier make available to each different fare product? How do you manage these seat allocations over the booking cycle in response to actual demand? How do you ensure that you reserve enough seats for the last-minute high-revenue customer?

Most of the questions above will be addressed in the next module on seat inventory control that immediately follows this one. Booking classes are an integral part of seat inventory control. Before we can discuss the logistics of inventory control we need to understand booking class assignment and structure.

We begin in the first section by describing the use of booking classes in a carrier’s computer reservation system and their evolution over time. Section 2 looks at the process of assigning different fare products to each booking class and identifies potential problems. In the final section we consider different booking class structures and explain the difference between independent versus nested control structures.

MODULE FIVE - SEAT ALLOCATION CONTROL

Multiple booking classes available on a given departure within a single compartment of the equipment all share a common inventory of seats. It is the goal of revenue management to increase or maximise the total revenues of the departure by filling those seats with the most profitable mix of customers. This is accomplished by determining the optimal seat allocations, or authorised selling levels, per booking class.

We begin this module by considering the benefits and dangers of discount seat allocation control and then look at the respective roles of the revenue analyst and computerised revenue management (RM) systems in determining optimal seat allocations. The second section explains the basic methodology used by many leg- or segment-based RM systems to determine seat protection levels. The final section considers the advantages and disadvantages of leg-based seat inventory control.

MODULE SIX - SEAT SPOILAGE MANAGEMENT

Carrier seats are a perishable inventory. Once a departure leaves, opportunity to gain revenue from the empty seats is lost. As we have seen in the previous modules, maximum revenue gains can be captured from a departure if all seats are sold and all demand for full-fare seats is met. Booking class assignment based on economic value and optimal seat allocation can lead to large revenue gains. However, carrier seats can also be “spoiled” or depart empty due to passengers who do not show up to board. Carriers need to take steps to avoid or minimise spoilage in order to maximise revenues.

In this module, we begin by defining spoilage, explaining why carriers need to overbook, and discussing some implications of this practice. The second section looks at how carriers actually determine optimal overbooking levels to compensate for passenger “no-shows”. The final section introduces some other overbooking measures and considerations including planning for pre-departure cancellations and multi-compartment upgrading.

MODULE SEVEN - GROUP REQUEST EVALUATION

As we learned in module 6, if the number of seats that you could book on a departure was limited to the physical capacity of the equipment, there would be spoilage due to passengers who don’t show up to board or who cancel their bookings prior to departure. However, the previous module focused on spoilage management as it relates to the “no-show” and pre-departure cancellation behaviour of individual passengers.

This module focuses on group management. As you will see, the pre-departure cancellation behaviour of groups is distinctive. In the first section we begin by describing the types and general characteristics of group travel. In section 2, we look at the process and considerations involved in evaluating a group’s request for seats. The final section addresses group cancellation behaviours and the strategies used by carriers to compensate for these pre-departure cancellations in order to avoid spoilage.

MODULE EIGHT - SCHEDULING AND CAPACITY ADJUSTMENTS

Pricing, inventory control, and scheduling are three departments that form a revenue management triangle. Scheduling is another means of matching consumer demand with supply. A carrier’s departure schedule defines its core product and is a key determinant of its profitability.

The first section in this module looks at the scheduling process as a whole. It considers its importance, the complexity involved and provides an overview of what occurs in the long-, medium- and short-term at different levels in the organisation. In the second section, we focus on the medium-term planning phase and consider the goals and challenges of schedule design and fleet assignment. This third section looks at the short-term management of the current schedule. This includes any ad hoc departure cancellations or other capacity adjustments that are needed closer to departure.

MODULE NINE - MONITORING AND MEASURING PERFORMANCE

Performance measurement involves monitoring the values of carefully chosen key performance indicators to determine progress toward specific, defined objectives. In the passenger transportation industry, performance measurement can be used to monitor when and where passengers are travelling, spot variations or trends, measure outcomes of business strategies, document changes in revenues, estimate outcomes of sales strategies, and indicate how well carrier objectives are being met.

This module presents an overview of the rationale behind a performance measurement system and covers some of the logistics and objectives involved in its implementation. You will learn how to ensure that the system continues over time to provide the useful information needed to further improve carrier performance. This is done in part through the selection and updating of key performance indicators. The final section discusses several types of performance reports commonly used in the carrier industry.  We also examine real data, analysing and evaluating patterns and trends, and categorizing departures.

MODULE TEN - PRODUCT AND PRICE DISTRIBUTION

Module 1 contained a quick introduction to the traditional means of carrier ticket distribution and how the internet is changing the way carriers do business. Now we have the opportunity to look at the history, evolution and future direction of travel product distribution in more detail.

We begin with the major elements in traditional carrier ticket distribution prior to the advent of the internet. We discuss how they evolved over time, their respective roles, and some concerns. The second section looks at travel product distribution in the context of the internet. We discuss how the traditional participants have adapted to new competitive pressures and describe new distribution channels and participants enabled by the new technology. The final section highlights two examples of new approaches to online product distribution.

MODULE ELEVEN - A REVENUE MANAGEMENT ORGANISATION

The primary objective of a revenue management (RM) organisation is to maximise the profitability of the company by applying knowledge about the market and the competition, using RM systems and tools. Building a successful RM carrier organisation requires three key elements. First, the carrier must select the appropriate RM systems and tools. Second, they must put the right people in the right places. Third, they must design and implement effective business processes. Success requires paying careful attention to both people and processes.

In this final module we begin by considering the people involved in the RM organisation, their job descriptions, skill sets, and the importance of good people management, training and team building. The second section focuses on developing robust and effective business processes and outlines the key steps that you need to follow in doing so. Section three introduces three different organisational structures that can be used within a RM organisation and considers some of the advantages and disadvantages associated with each approach. It also discusses how and why you might choose to change the organisational structure over time.