Smaller airlines are absorbing lessons from the grown-ups, adopting the revenue management practices of larger carriers to compete more effectively, writes Murray Smyth of Transport & Tehnology Consulting
Originally developed in the 1980s by pioneering major US carriers and a few specialist service providers, airline revenue management has been widely adopted throughout the industry. This reflects the promise and fulfilment of significant improvements in revenue per passenger, per flight and for the airline as a whole. Such improvements have been variously quantified and claimed, mostly by directly interested parties, in revenue increments ranging from 3-10% a year. However, revenue management has remained something of a mystery to most, both inside and outside aviation.
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Butchange may beafoot. Many smaller and newer airlines around the world are now successfully employing revenue management practices and procedures to survive and thrive, despite the current cyclical downturn.
What has changed? We spoke to some carriers in Europe and central Asia that are actively taking on the challenges of effective revenue management to find out.
Exploiting change
Latvian carrier airBaltic began operations in 1995, shortly after Latvian independence, as a joint venture between the Latvian government and SAS. Its regional business model was based on connecting with the SAS network through Stockholm and Copenhagen.
In 2004 Latvia joined the European Union, opening the prospects of intra-European Open Skies for airBaltic. Exploiting this, it moved in the low-cost carrier direction with the introduction of simple one-way fares and more point-to-point destinations. This translated into very significant annual growth of more than30% annually in the years to 2008.
However, the Baltic region was an early indicator of the economic downturn that would engulf the world later in 2008, with a slide into negative GDP figures after years of sustained strong growth. AirBaltic sales vice-president Gregory Pomerantsevrecalls: "Going into 2008 we could clearly see that the Baltic market, on which airBaltic largely depended, was about to collapse." This proved to be the case in a big way, with local travel agency sales declining by more than40% in Latvia, Lithuania and Estonia and inbound tourist traffic also falling.
In response to these circumstances airBaltic elected to grow its way out of trouble. It redirected its strategy, developing Riga as a hub and opening a number of new destinations, such as Hanover, Amsterdam and Dubai and various regional cities in Scandinavia. It provided convenient routes and schedules between eastern and western Europe to connect traffic and was helped somewhat by the collapse of flyLAL, opening opportunities in the Lithuania market. The results for the first half of 2009 proved impressive:
15% revenue growth
7% growth in passenger numbers, on track to achieve airBaltic's 3 million target for 2009
Load factor up 7% and yield per passenger stable, despite the market conditions
Connecting traffic was 12% of total beforethe 2008 changes. It is now represents 52% of the airline's traffic.
The shift to connecting traffic has led to a management quantum leap, as all or most of the 50 leg-based city pairs became more thana thousand O&D markets. A major challenge has been to adapt its revenue management methodology, processes and organisation to cope with that significant shift.
To meet this challenge, airBaltic has employed a revenue management solution from Lufthansa Systems, point of sales controls in the passenger management system provided by Amadeus and a database of supporting information developed in house to manage the optimisation of revenues over its hub and spoke network.
In addition airBaltic revenue management director Frank Neuman says: "A lot of what has been achieved has been due to the very close working relationship between the network/schedule planning group and revenue management group. This has allowed for fast decisions on capacity and pricing, essential in unfamiliar markets."
From the outset airBaltic recognised its new strategy depended on the right commercial leadership, organisation and the deployment of more analytical skills. This is demonstrated by the appointments of chief commercial officer Tero Taskila, previously with Gulf Air, senior vice-president for strategic network and fleet planning Richard Roberts, formerly with Qatar Airways, and Neuman himself, who is ex-Deutsche BA and Germanwings.
The challenge of securing sustainable profitability remains, with adverse market conditions and fuel prices rising. Andthere arefurther opportunities for revenue improvements at this pioneering carrier. Neuman says: "We would also like to see the introduction of a hybrid revenue management system that forecasts and manages demand at the leg and O&D level simultaneously. This will deliver significant incremental revenue."
Reaching the top
Athens-based Aegean Airlines celebrates its tenthanniversary this year having become the number one carrier in Greece in 2008, a significant achievement in these few years. Just as notably in 2008, despite the oil price shock, its revenues grew 27% to €612 million ($913 million) and operating profits rose 23% to €57.5 million. The story continues. Early 2009 results show passenger volumes have risen 9% and revenues are 13% up. Reflecting this success, Aegean's long-standing commercial ally Lufthansahas sponsored its entry into the Star Alliance, a move which promises a large increase in destination possibilities for both Aegean and its customers.
How have revenue management practices contributed to Aegean's success story? Head of revenue management and pricing Roland Jaggi says: "One of the most important things we needed to do was address the very late booking patterns of the Greek market by stimulating earlier demand. This would provide us with a certain revenue base while we worked with the less price sensitive customer segments to optimise revenue per passenger." This was done through the airline's own website and a lot of innovative advertising aimed at educating the Greek traveller that earlier booking means cheaper fares. The results?
Summer 2006: half of bookings on typical Athens-originating flights made within 14 days of departure
2008: half of all bookings now made more than 35 days before departure
The later booking 50% pay higher fares, resulting in a net 10% uplift in yields.
As Aegean grew in terms of aircraft, routes, frequencies and passengers, it became clear that manual management of inventory and revenue management could not be sustained. After evaluating the alternatives it successfully introduced the Airmax revenue management system from Sabre in late 2007. This was a big and challenging project as it required significant business practice changes.
"With the forecasting and reporting capabilities came a much better view of forward booking trends, plus very helpful filtering that allows our people to prioritise the exceptional flights for intervention and management," says Jaggi. "However, it took a great deal of training and coaching in the theory and practice of revenue management for our people to have real confidence in the forecasts and automated inventory settings they produce."
Aegean appointed Jaggi, previously with Swiss and SwissAir, for his depth of experience in the theory and practice of airline revenue management and tasked him with developing these capabilities within Aegean. Through a combination of analytical skills development and recruitment, Jaggi's team is now focused on critical flight management, early intervention and monitoring of competitors, covering price and availability.
In addition, although Aegean operates a point-to-point network with simple one-way fares, the development of itsEuropean network is creating connecting opportunities at Athens thatare being actively exploited.Work in progress for the future includes more active overbooking - once more automated passenger re-accommodation procedures and denied boarding processes are in place - and the introduction of selected ancillary revenue products to increase unit revenues.
Quantifying what financial contribution revenue management has made at Aegean is difficult, as with many airlines. The usual measures, such as revenue per available seat kilometre, cannot account for the simultaneous changes in capacity, markets, frequencies, passenger volumes and competition that Aegean experienced. The broad conclusion that Aegean managing director Dimitris Gerogiannis draws is that "without the introduction of new revenue management practices at the end of 2007, Aegean would have been much more vulnerable to the oil price hikes of 2008 and in much worse shape by the end of that year".
National champion
Air Astana is in a rather different position. Founded in 2002 as a joint venture between the government of Kazakhstan, which has been independent since 1991 following the break-up of the Soviet Union,and aerospace group BAE Systems, its primary mission was and is to support national development.
Kazakhstan is larger in land area than western Europe, with massive natural mineral resources, and Air Astana provides the vital domestic services that link the larger cities and economic centres. International destinations are serviced in all directions, including London, Frankfurt, Moscow, Istanbul, Delhi and Beijing. In addition there is a growing focus on central Asia, with new flights to Baku, Bishkek and Urumqi. Air Astana continues to grow rapidly and its 2008 year-on-year results included:
15% increase in ASKs
8% increase in revenue passengers
Revenues of $659 million, up 19%
Profits of $17.1 million, a decrease of 52%, largely due to a combination of fuel cost increases and the devaluation of the local currency, the tenge, by 23% against Air Astana's reporting currency, US dollars.
As Air Astana has developed, the need to compete effectively with carriers such as British Airwaysand Lufthansa to gain its fair share of the higher yield international markets has become clear. Therefore in early 2008 Air Astana decided to introduce formal revenue management practices, along with an automation project thatlinked the PROS system with the AmadeusAltea reservations and inventory control service.
Once again it seems that people and organisation were the real challenges. Air Astana director of revenue management and planning Aiman Tileubayeva comments: "The most important aspect of the whole project was the creation of a central revenue management function and organisation within Air Astana. For the first time we established formal key performance indicators for flights, routes and markets which provided a framework within which pricing and capacity decisions could be taken."
Repeating the experience of many other airlines, Air Astana identified a gap in its analytical skills, which it addressed by taking on new recruits, fresh from university with mathematical and operations research capabilities. Combining the abilities of the new people with the new system-generated booking forecasts, Astana could for the first time analyse demand elasticity and had the information to help decide when to intervene in terms of availability and pricing, and when to hold.
Before taking leadership of Air Astana's revenue management in early 2009, Tileubayeva wasin network planning. This meant that it was natural for her to ensure that various commercial functions worked jointly to optimise revenues at the airline. The functions involved included network andschedules, sales anddistribution, and airports.
With regard to network and schedules, Tileubayeva says the airline has put specific processes in place thatsupport "demand scheduling". This means Air Astana can change the capacity assigned to a market or flight up or down as demand develops against forecast around four weeks before departure.
Air Astana now also ensures that its sales and distribution team collaborate carefully with revenue management. This means that short-term sales promotions and other market stimuli can be focused on markets and flights where they are needed most and the airline has the most to gain.
Air Astana introduced overbooking for the first time early last year. This required significant process changes at the airports, including managing overbooking limits by flight, as well as new standby and denied boarding compensation procedures. "Only by working very closely with the airports team were we able to successfully introduce overbooking with minimum disruption to our customers and staff," says Tileubayeva.
Even in the domestic market, where price and schedule regulation makes revenue management difficult, Air Astana has found some opportunities. It favours overseas saleswhich include connecting domestic segments to gain currency exchange benefits from the application of point of sale controls.
Air Astana firmly believes the introduction of these new revenue practices has made a major contribution to its ability to weather recent industry challenges and its revenue figures bear this out.
Concluding, Tileubayeva says: "We know that we are only beginning with revenue management and have much more to do. Around the corner are the introduction of ancillary products, both air- and non-air, and the adoption of more structured and analytical competitive analysis to ensure that we have our availability and price as right as possible in all classes and all flights."
It seems from the examples of airBaltic, Aegean and Air Astana that revenue management techniques and practices, proven by major carriers in large-scale markets, are now delivering significant contributions for them. Some common themes have also emerged.
The first of these is that practices thathave been adopted and successfully employed by these smaller carriers have been proven many times over by larger carriers, but the significant financial benefits delivered to each of them are unquestionable. And now, having introduced revenue management techniques, each airline is aware of opportunities for further improvement in terms of closer competitive analysis, managing increasingly important ancillary revenues, implementing origin and destination control and so on.
Also airBaltic, Aegean and Air Astana have opted for different solutions from different companies, including Lufthansa Systems, Sabre and PROS. This indicates that each can be effective in the right circumstances and deliver the promised financial benefits.
Each of the carriers has largely focused on building internal revenue management capabilities and expertise, recruiting veterans from overseas and mentoring local young analysts.
They have also implemented significant organisational change to support the introduction of revenue management. It seems that this final point, getting the people and organisation changes right, proved the biggest challenge, but also had the biggest payoff.
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Murray Smyth leads Transport & Technology Consulting, which advises airlines on business performance improvement. He was previously with Sabre, Deloitte Consulting and Unisys
Read our earlier coverage about game-changing smart planning systems
Source: Airline Business
