RM Level One - The Basics of Revenue Management

Services, unlike manufactured products, cannot be stored for sale at a later date. Fluctuations in demand challenge a capacity-constrained service industry. Transportation services can have a relatively fixed seat capacity, which is based on the amount of equipment they have. When a departure leaves with empty seats, the opportunity to earn money for those seats is lost. The purpose of this program is to help transportation services and RM practitioners apply the best revenue management and pricing principles in order to optimally manage demand and maximize profitability.

This course includes 6 modules which will provide you with a general overview of pricing and revenue management concepts and theories. The training manual is an electronic Adobe Acrobat PDF file, 155 pages, and in color. The manual can be downloaded and printed, or viewed from our online learning center. Module related powerpoint presentations and comprehension assignments are included.

Relevant articles, papers, and presentations, have been collected and are available from our online learning centre, to enhance the learning experience, and provide real-life examples and case studies.

A highly qualified instructor will be assigned to guide the participant throughout the duration of the course. The instructor will provide feedback on each comprehension assignment as well as the final assignment paper. Please note that all our instructors possess current practical working experience in pricing and revenue management.

The six modules cover the following information:

Module 1:  Managing demand 

To understand how carriers manage demand for passenger seats, it is important to realize that transportation is part of the service industry and that seating capacity can be relatively fixed.

Transportation carriers are in business to provide customers with a service - transport from A to B. Other businesses that provide services include hotels, restaurants, and theaters.

Unlike manufacturing companies that produce products that can be made in advance and stored for future sale, service industries offer consumers a perishable commodity. Once a departure leaves with empty seats, a carrier loses any chance to earn revenue from those seats.

In some types of transport, for example, a subway, seating capacity is elastic. As more passengers arrive in a subway car, they fill up the remaining seats and then stand in any available space. In most passenger carriers, on the other hand, seating capacity is fixed. Arriving passengers are assigned to specific seats. Offering more departures, either by operating existing equipment for longer periods of time and lessening down time or by leasing extra equipment can stretch seating capacity for a particular route.

The first step of revenue management (RM) is to understand the characteristics of passenger demand, the strategies for managing the demand, and the forecast of demand.

Module 2:  Differential pricing

Differential pricing, or variable pricing, is used by transportation services to provide tickets with different prices that will appeal to different market segments and will control demand levels. Setting ideal prices for seats for a particular departure involves segmenting the market, finding out fixed and variable costs, knowing the prices set by competitors, and being familiar with customers' preferences. 

It is more difficult to calculate the costs involved in delivering a service, such as a seat for a departure, than it is to determine the costs of labor, material, manufacturing, and shipping a product. Transportation companies need to know the costs of providing their service, however, to set variable price levels that will produce desired profit margins. 

Transportation companies have a high ratio of fixed costs to variable costs. Fixed costs for a departrue can include the cost of fuel and fees. Variable costs include the cost of meals, drinks, and insurance. The variable cost for serving one extra customer is often very small. 

The service for the same departure might be appreciated differently by individual customers. Some customers might be willing to pay more for premium service and more convenient departure times. Some travelers might prefer the convenience of buying tickets from automated vending machines or through the Internet. Others might be willing to pay higher prices to have personal contact and to avoid spending time searching the Internet and comparing complex schedules of different fares from different companies. 

Module 3:  Booking class assignment and seat inventory control

Transportation seats are a perishable inventory. At departure, opportunity to gain revenue from empty seats is lost. Maximum revenue gains can be captured from a departure if all seats are sold and all demand for last minute high revenue seats is met. "Inventory control" of seats is the process of controlling the sale of different fare classes for each departure.

"Optimal" seat allocation can lead to large revenue gains.

Module 4:  Performance measurement 

They say that if you can’t measure it, you can’t manage it. Performance measurement involves watching values of performance measures (units of measure), to find out progress toward specific, defined objectives. In the transportation industry, performance measurement can be used to record when and where passengers are travelling. It can spot variations or trends, measure outcomes of business strategies, document changes in revenues, estimate outcomes of sales strategies, and show how well airline objectives are being met.

A successful performance measurement system is comprised of a balanced set of a few measures (key performance indicators). Transportation performance measures include spill, stifle, spoilage, and denied boarding. The performance measures should be logical and clearly defined. If the measure is new, the carrier should try to identify existing data sources or it may have to create new sources. All data sources need to be credible and cost-effective.

A performance measurement system should specify the data needs (data source, quantity, population), frequency of measurement, calculation methods (equations and definitions of key terms), and final report specifications (data comparisons, chart and graph types). To be most useful, raw data should be transformed into understandable information that is readily available to airline employees working in various departments.

This module presents a review of the reason behind performing and updating a performance measurement system in a transportation company. It then discusses of several types of performance reports including advance booking report, passenger load factor report, denied boardings and spoilage report, spill and stifle report with exception alerts, and historical seat demand report.

Module 5:  Scheduling and capacity adjustments 

A transportation company's scheduling process decides where and when it will operate and what equipment it will use. This has long-term, medium-term, and short-term phases. It is a key determinant of a company's profitability, since it aims to match customer demand with supply (seat capacity). To increase revenue opportunities in today's fast paced, ever-changing global marketplace, carriers need to adapt quickly and efficiently. Effective scheduling and capacity adjustment becomes a means to an end.

The key to ideal scheduling is to balance supply with demand. Customer demand for seats is influenced by three main causes: departure times, equipment types, and delivery of service. For example, some time-sensitive customers might seek departure times that enable them to attend important business meetings, while others want to make critical connections to vacation destinations. Passengers usually prefer new equipment, especially for travel that lasts longer than 1-hour. They might feel that certain equipment types are safer. Customers may be seeking certain types of services (for example, meals).

North American carriers that serve seasonal markets place entire fleet equipment types to different destinations depending on the time of year. During the summer peak travel period, all wide-body aircraft are usually assigned to international trans-ocean routes. In winter, some of these aircraft are placed to sunny destinations, such as the Caribbean, Florida, Mexico, and Hawaii.

Module 6:  Building a revenue management organization

To build a successful revenue management (RM) organization, three key elements are needed. First, the carrier must select suitable RM systems and tools. Second, they must put the right people in the right places. Third, they must design and set up a robust process. Success needs paying careful attention to both people and processes. Often RM is defined by systems, data, forecasting, origin and destination (O&D) processing, and revenue optimization. But these are just tools of RM. An RM system only works well when skilled people follow carefully designed processes.

Many carriers have succeeded (and continue to succeed) in realizing incremental revenues by using RM systems. In the same competitive environment, other carriers have created and took apart their RM organizations, and their expensive RM systems stay idle. Still other carriers have shut down their RM systems and switched back to doing manual inventory control, because they could not achieve expected results. Why are some companies successful in applying RM principles while others fail? A closer examination of the latter carriers will likely reveal that their people and processes were not managed properly.

People are by far the most valuable resources of an RM organization. Southwest Airlines is a good example of an airline that has achieved success by paying attention to managing people. They believe that if the company takes care of their employees, their employees will take care of the customers, and the shareholders will also be happy. The same philosophy can work when managing an RM group. The challenge lies in deciding how to apply this philosophy.

RM staff members interact with employees in many different departments ranging from strategic to operational. They continually react to market changes by adjusting schedules, prices, and inventories to match swings in demand. To help make the right decisions, they need a well-structured process.

The objective of an RM organization is to increase the profitability of the company by applying knowledge about the market and the competition, and by using RM systems and tools. This module, "Building a Revenue Management Organization," will first describe people and processes. Next, it will characterize different types of RM organizations and close by reiterating the importance of RM.