March 2017 | issue 1

Ryanair has Rockstar Yield Management: Lessons Learnt from Peak and Off-Peak Pricing

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In this post we take a moment to look

at one of the rock stars of yield

management and airfare pricing

strategies – Ryanair. If you’ve ever

wondered why average fares are €60

during the high period and half that

during the low periods, then Airline

Intelligence & Research explains in this

article why this may be the case and

how it affects airline profits.

Seasonal and Peak Demand

Airlines are very low margin, high

volume businesses that make most of

their money during peak travelling

periods. These peaks might be in the

morning and afternoon, they might be

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on Friday afternoons and Sunday, or they

may be during school holidays scattered

throughout the year. Given that the true

low cost carriers (LCCs) like Ryanair

predominantly cater for highly price

sensitive travelers, then it is more

imperative for them to get their prices

right. This is as opposed to full service

airlines (FSAs) like British Airways and

Qantas, where product is just as important

as price, perhaps more so in the case of

some passengers.

That being the case, often the difference

between poor airline earnings and

outstanding airline earnings thus comes

down to how analysts use revenue

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management systems to drive yield at the

peak; in other words, how well a yield

manager uses the pricing methods

available to them to capture as much of

the willingness to pay of peak passengers

as possible and leave no money on the

table.

One airline that has used its yield

management and revenue systems to great

effect in differentiating between peak and

off-peak fares is Ryanair. Ryanair has the

peakiest average airfare profile in world

aviation, according to the Airline

Intelligence & Research (AIR) Database –

see Figure 1 below.

Airline Intelligence & Research | Consulting | AIR Academy Training Dr Tony Webber | 0423 028 720 | tony.webber@airintelligence.com.au | @ air_economist www.airintelligence.com.au | https://www.linkedin.com/in/drtonywebber

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AIR Academy Course Dates

5 April 2017 – Modelling and Forecasting PRASK

12 April 2017 – Impact of Capacity on Revenue and Cannibalisation Effects

Photo Credit | Pixabay | Hans Mont Blanc Peaks

Airline Intelligence & Research

AIR Academy Workshop 1 Sydney | 5 April 2017 | 9 am – 4 pm Modelling and Forecasting PRASK

and Revenue This course is designed for Strategy Managers, Yield and Revenue Managers and Airline Analysts.

• Demand for ASKs

• Supply of ASKs

• Equilibrium PRASK

• Difference between Yield and PRASK

• What Drives Downward and Upward Movements in PRASK? What’s Airline-controllable and uncontrollable?

• Organic PRASK-flation

• Where do you Find the Driver Data?

• Why might Share Prices be a More Important Driver of PRASK than GDP?

• Linear versus Logarithmic Models of PRASK

• Seasonality in PRASK

• Estimating a PRASK Relationship using Regression Analysis

• PRASK Decompositions

§ What is this?

§ Why is it Important?

• Using Regression Analysis for Forecasting PRASK and Revenue

• Using Elasticity Estimates for Forecasting PRASK and Revenue

• Case Study Cost $990 (incl. GST) pp.

Early-bird rate $790 (incl. GST) pp

(Where payment is received 2 weeks prior to course date.)

Course needs a minimum of 6 to go ahead.

For more information and bookings or in-house training queries please email admin@airintelligence.com.au

We can see in Figure 1 that during the

September quarter 2016 the average

airfare of Ryanair in the case of its

scheduled services was 59 Euro whereas

during the March quarter 2016 the

average scheduled airfare was just 29

Euro.

The September quarter (which involves

travel during the months July, August

and September) are the key summer

months in Europe where most

Europeans do their travelling and school

kids are on holidays, thus allowing family

vacations. The March quarter (January,

February and March) are the winter

months where families tend to stay at

home and indeed indoors.

A sense for the dramatic seasonality in

Ryanair’s average airfare is best seen

when it is compared to the average

of other carriers that operate in a

similar segment of the market

(European leisure segment). Figure

2 below presents Air Berlin’s

quarterly average airfare over the

past 9 years.

Compared to Ryanair there is very

little seasonality in Air Berlin’s

quarterly average fare movements.

Given the two carriers are likely to

experience similar travel demand

seasonality, most notably strong

demand during the summer months

and weak demand during the winter

months, this would suggest that the

yield and revenue management

approaches of the two airlines in

dealing with seasonal peaks are

decidedly different. This in turn

implies that one carrier must be

leaving money on the table.

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AIR Academy Workshop 2

Sydney | 12 April 2017 | 9 am – 4 pm

Impact of Capacity on Revenue and Cannibalisation Effects

This course is designed for Strategy Managers, Yield and Revenue Managers and Airline Analysts.

• Different capacity types

o Own

o Internal Competitor

o External Competitor

• Revenue Identities

o Revenue level

o Revenue growth

• Yield Elasticities to capacity

o Own

o Internal Competitor

o External Competitor

• Why do Yield Elasticities of Capacity Differ Across Capacity Types

• Yield Elasticities Versus Demand Elasticities

• Yield Elasticity Drivers

• Profitable and Unprofitable Cannibalisation

• The Revenue Curve

• Quantifying the impact of capacity on Revenue with and without Competitor Follow

• Case Study

Cost $990 (incl. GST) pp.

Early-bird rate $790 (incl. GST) pp

(Where payment is received 2 weeks prior to course date.)

Course needs a minimum of 6 to go ahead.

For more information and bookings or in-house training queries please email admin@airintelligence.com.au

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2009), the seasonal amplitude has more

than doubled.

The following sections will uncover the

conditions that are required for seasonal

amplitudes of this magnitude to

maximise profit, and why these

conditions may change over time as is

implied by the sharp rise in Ryanair’s

seasonal fare premium.

Optimal Peak Premium

The key to understanding the profit

maximising seasonal amplitude in

average fares is that there is significant

seasonality in airline marginal revenue

but very little seasonality in airline

marginal cost. Profit maximisation,

however, requires that marginal

revenue equals marginal cost. This

means that fares must vary across the

peak and off-peak periods to smooth

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Peak Fare Premium

This is where we begin to get

technical. If we take the percentage

difference between the peak and off-

peak Ryanair average quarterly fares

for each calendar year over the past

decade and a half, we obtain the time

series presented in Figure 3.

At AIR aviation analytics, we refer to

the information presented in Figure 3

as the seasonal amplitude (the

difference between the peak and

trough average fares). There are two

important lessons to be learnt from the

seasonal amplitude estimates presented

in Figure 3. The first is the extent to

which the peak fare exceeds the off-

peak, which has varied between 28%

and 108% over the past fifteen years.

The second is the fact that post the

Global Financial Crisis (in and around

Airline Intelligence & Research

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out marginal revenue so that it is stable

and equal to marginal cost. This requires

fares to be higher during the peak than in

the off-peak.

The extent to which fares are higher in

the peak depends on the price elasticities

of demand in the peak versus off-peak.

The less elastic demand is at the peak, the

greater is the seasonal amplitude.

AIR Academy modelling has found that a

profit maximising airline will set the

seasonal peak fare at a premium to the

off-peak average fare according to the

following expression:

=

!"#$ !"#$%&'&%(!!""!!"#$ !"#$%&'&%((!!!"#$ !"#$%&'&%()×!""!!"#$ !"#$%&'&%(

The peak elasticity measures the

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sensitivity of airline demand to a change in

fares during peak travel periods while the

off-peak elasticity measures the same at

off-peak periods. The formula essentially

says that the more sensitive off-peak

demand is to the airfare than peak demand,

the greater will be the peak fare premium.

To illustrate, suppose that the airfare

elasticity of demand at the peak is -1.5,

and the airfare elasticity of demand at the

off-peak is -2.5. It follows that the peak

fare premium that maximises profit is:

= !!.!!!.!

!(!!!.!)×!!.!= 80%

To justify a seasonal peak fare premium of

108%, which is Ryanair’s current estimate

of the seasonal amplitude of fare premium,

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assuming the peak elasticity is -1.5

would require an off-peak elasticity of

around -3.3 or around double the off-

peak elasticity.

Given the way that Ryanair sets it peak

fares relative to off-peak fares, we

believe that Ryanair is likely to be very

close to profit maximization. This is

likely to be reflected in the outstanding

earnings performance of the airline

over a long horizon.

Changing Seasonal Amplitude

Our next question is: why has Ryanair

sharply increased the seasonal

amplitude? The answer is that the

airline has taken a view that the peak

time travellers have become less elastic

relative to the off-peak passengers.

How would these changes occur? A

simple explanation is that the real

incomes of those who travel during the

peak have grown faster than the real

incomes of those who travel during the

off-peak. Another explanation is that

Ryanair is attracting more business-

purpose passengers into the peak.

Whatever the reason, what we have

learnt is that one of the reasons for the

great success of Ryanair and its

management is the attention to

seasonal detail of its yield management

team. There are significantly lessons

here for other airlines if they wish to

avoid leaving money on the table.