Our institute has been conducting extensive research on airline revenue management for the past three years, and parts of your article 'A system approach' (Airline Business, January) seem to be based on false assumptions. Our first concern is the quoted 1 per cent increase in airline revenues. While there is no way of relating your examples to the bottom line, we doubt that the system could lead to any measurable improvement, at least in generic cases.
Origin and Destination Revenue Management Systems (ODRMS) may improve the bottom line in specific cases, mainly when they address sectors with captive markets, as is the case for SAS in Scandinavia.
The assumption that extra revenue squeezed out of a particular passenger goes to the bottom line is nonsense. The one-time profit can be offset by the fact that a passenger has the choice of flying with a competitor. So while you increase the marginal yield, you also decrease the number of potential customers. This is true when increasing tariffs, and hidden tariff increases through RMS are no exception.
For this reason we developed our Business Economics Assessment Method (Beam), a corporate revenue and margin management technique, which shows the bottom line impact of any strategic decision. Many examples show only a decrease in revenue will produce higher margins, by attracting extra business.
In our view, yield or revenue management systems should be called 'seat voting systems'. It is hard to find any actual management activity. Examples 2 and 3 in your article are symptomatic of such dumb voting processes. In example 2, the passenger bound for Stockholm in the morning will not take the 10:20 flight out of Copen-hagen. He will take another airline via another hub instead; hence the revenue management system turns out to be a no revenue system. Example 3 can only work within a captive market.
The examples concerning revenue per flight are also flawed. You show two tables showing the difference in revenue with or without ODRMS. In the first place, it is 'common sense management' to squeeze more revenue out of a market where demand is greater than supply. My question is: How do ODRMS help when your aircraft is only three-quarters full?
Furthermore, in both tables the calculation of the 'additional revenue' of SKr85,470 for the flight is based on the net leg revenue as calculated by the ODRMS. This has no relation to the actual yield or revenue. The 'net leg revenue' is a virtual system value with intangible items such as displacement cost, recapture rate and prorate factor.
I would guess that the 1 per cent increase in revenue is derived by comparing actual revenue and profit margins, but whether this translates into anything positive when consolidated on a yearly basis remains to be demonstrated.
As to wise competitors, a carrier with an efficient revenue management system does not have to play with price wars. But a carrier with a system such as Beam can lift most of the fixing limits out of the yield management system, leaving sales patterns to market demand in most cases. Also, 'wars' between yield systems can still be devastating because lowering the yield fixing parameters is the same as selling more cheap tickets.
Captain E A van de Winckel
Director
The Aviation Development Foundation
Breda, the Netherlands.
Source: Airline Business
