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Aviation Training Program 

Table of Contents iii 

AIRLINE REVENUE MANAGEMENT

TABLE OF CONTENTS

Introduction ................................................................................................................................................ 1

Module 1 Introduction to Revenue Management.................................................................................... 5

1.1 Deregulation in the Airline Industry .......................................................................................... 6

1.1.1 Airline Deregulation ..................................................................................................... 6

1.1.2 Effects of Deregulation ................................................................................................ 7

1.2 Why Do We Need Revenue Management? ........................................................................... 15

1.2.1 Perishable Capacity .................................................................................................. 15

1.2.2 Seating Capacity and Variations in Demand ............................................................ 16

1.2.3 Variable Pricing and Market Segmentation ............................................................... 18

1.2.4 Basic Revenue Management Principles ................................................................... 201.3 Airline Reservations and Product Distribution ........................................................................ 26

1.3.1 How are Airline Products Distributed? ...................................................................... 26

1.3.2 What is the Role of the Internet? .............................................................................. 28

Module 2 Managing Passenger Demand ............................................................................................... 39

2.1 Airline Travel Demand ............................................................................................................ 40

2.1.1 Understanding Variations in Demand ....................................................................... 40

2.1.2 Seasonal Variations in Demand ................................................................................ 41

2.1.3 Holidays and Special Events..................................................................................... 42

2.1.4 Time of Day and Day of Week .................................................................................. 43

2.1.5 Economic Conditions ................................................................................................ 43

2.1.6 Schedule Changes .................................................................................................... 43

2.1.7 Time of Booking ........................................................................................................ 44

2.1.8 Cancellations and No-shows .................................................................................... 44

2.1.9 Price .......................................................................................................................... 45

2.2 Demand Strategies ................................................................................................................ 50

2.2.1 What are the Options? .............................................................................................. 50

2.2.2 Improving Efficiency .................................................................................................. 51

2.2.3 Adjusting Marketing Variables .................................................................................. 52

2.2.4 Managing Demand in a Competitive Market ............................................................. 54

2.3 Forecasting Demand in the Airline Industry ........................................................................... 59

2.3.1 Importance of Forecasting Demand .......................................................................... 592.3.2 Forecasting Demand Based on History .................................................................... 60

2.3.3 The Revenue Analyst ................................................................................................ 63

2.3.4 Computerised Revenue Management Systems ....................................................... 63

2.3.5 Best Practices ........................................................................................................... 65

Module 3 Pricing ...................................................................................................................................... 75

3.1 Airline and Customer Costs ................................................................................................... 76

3.1.1 Airline Costs .............................................................................................................. 76

3.1.2 Customer Costs ........................................................................................................ 77

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iv  Airline Revenue Management

3.2 The Price – Demand Relationship and Inventory Control ...................................................... 81

3.2.1 Differential Pricing ..................................................................................................... 81

3.2.2 Fare Rules and Restrictions ...................................................................................... 84

3.2.3 Inventory Management and Pricing .......................................................................... 87

3.3 Pricing Strategies ................................................................................................................... 923.3.1 How Do Airlines Determine Prices? .......................................................................... 92

3.3.2 Cost-based Pricing .................................................................................................... 93

3.3.3 Competition-based Pricing ........................................................................................ 94

3.3.4 Value-based Pricing .................................................................................................. 94

3.3.5 Trends in Pricing and Marketing ............................................................................... 97

Module 4 Booking Class Assignment ................................................................................................. 111

4.1 What are Booking Classes? ................................................................................................. 112

4.1.1 Booking Classes and Revenue Management ......................................................... 112

4.1.2 Evolution of Booking Classes.................................................................................. 113

4.2 Booking Class Basics ........................................................................................................... 1164.2.1 Assigning Fare Products to Booking Classes ......................................................... 116

4.2.2 Problems with Booking Class Assignment .............................................................. 119

4.3 Booking Class Structures ..................................................................................................... 124

4.3.1 Independent versus Nested Booking Class Structures .......................................... 124

4.3.2 Other Nesting Structures ......................................................................................... 129

Module 5 Seat Inventory Control ......................................................................................................... 139

5.1 Seat Allocation per Booking Class ....................................................................................... 140

5.1.1 Discount Seat Allocation Control ............................................................................ 140

5.1.2 Revenue Analyst ..................................................................................................... 142

5.1.3 Revenue Management Systems ............................................................................. 144

5.2 Economic Approach to Seat Protection ............................................................................... 149

5.2.1 Expected Marginal Seat Revenue (EMSR) ............................................................. 149

5.2.2 Establishing Protection Levels using EMSR ........................................................... 150

5.2.3 Exceptions to EMSR ............................................................................................... 154

5.3 Revenue Optimisation and Seat Inventory Control .............................................................. 158

5.3.1 Terminology: Legs, Segments, and Origin and Destination (O&D) ....................... 158

5.3.2 Leg-based Seat Inventory Control .......................................................................... 160

5.3.3 Network (O&D) and Partial Network (Partial O&D) Seat Inventory Control ............ 165

Module 6 Spoilage Management .......................................................................................................... 179

6.1 Why Do Airlines Overbook Flights? ..................................................................................... 180

6.1.1 What is Spoilage? ................................................................................................... 180

6.1.2 What is Overbooking? ............................................................................................. 182

6.1.3 Denied Boarding and its Costs ............................................................................... 184

6.1.4 Overbooking & Revenue Management ................................................................... 185

6.2 How do You Set Overbooking Limits? ................................................................................. 189

6.2.1 Calculating and Forecasting No-show Rates .......................................................... 189

6.2.2 Minimising Spoilage and Denied Boarding Costs ................................................... 191

6.2.3 Overbooking Risk Factors ....................................................................................... 192

6.2.4 Overbooking & Airline Operations ........................................................................... 194

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Aviation Training Program 

Table of Contents v 

6.3 Other Overbooking Measures and Considerations .............................................................. 199

6.3.1 Pre-departure Cancellations ................................................................................... 199

6.3.2 Decrement ............................................................................................................... 200

6.3.3 Multi-cabin Upgrading ............................................................................................. 202

Module 7 Group Management .............................................................................................................. 211

7.1 Group Travel ........................................................................................................................ 212

7.1.1 Types of Group Travel ............................................................................................ 212

7.1.2 Characteristics of Group Travel .............................................................................. 213

7.2 Group Request Evaluation ................................................................................................... 216

7.2.1 What is Group Evaluation? ..................................................................................... 216

7.2.2 Who does Group Evaluation? ................................................................................. 217

7.2.3 What is Displacement Cost? ................................................................................... 218

7.2.4 Booking Class Protection and Allocation Levels ..................................................... 221

7.2.5 Special Handling Considerations ............................................................................ 223

7.3 Group Attrition ...................................................................................................................... 2277.3.1 Group Cancellation Behaviours .............................................................................. 227

7.3.2 Compensating for Group Cancellations .................................................................. 229

7.3.3 Hedging ................................................................................................................... 231

Module 8 Scheduling and Capacity Adjustments .............................................................................. 241

8.1 Airline Scheduling Process .................................................................................................. 242

8.1.1 Why is Scheduling Important? ................................................................................ 242

8.1.2 Network Perspective ............................................................................................... 243

8.1.3 Timeline and Organisational Perspectives .............................................................. 245

8.2 Schedule Design and Fleet Assignment .............................................................................. 252

8.2.1 Core Schedule ........................................................................................................ 252

8.2.2 Schedule Design Process ....................................................................................... 253

8.2.3 Schedule Design Parameters ................................................................................. 254

8.2.4 Decision Support Tools ........................................................................................... 255

8.2.5 Evaluation Criteria ................................................................................................... 256

8.3 Schedule and Capacity Adjustment ..................................................................................... 260

8.3.1 Ad Hoc Flight Cancellations .................................................................................... 260

8.3.2 Upgauges and Downgauges ................................................................................... 262

8.3.3 Special Events Capacity Management ................................................................... 263

Module 9 Monitoring Performance ...................................................................................................... 273

9.1 Performance Measurement .................................................................................................. 274

9.1.1 Background ............................................................................................................. 274

9.1.2 Key Performance Indicators .................................................................................... 275

9.1.3 Sharing Information ................................................................................................. 276

9.2 Establishing and Updating Performance Measures ............................................................. 280

9.2.1 Selecting Appropriate Measures ............................................................................. 280

9.2.2 Generating Useful Information ................................................................................ 281

9.3 Performance Measurement Reports .................................................................................... 285

9.3.1 Using and Creating Performance Reports .............................................................. 285

9.3.2 Advance Booking Report ........................................................................................ 287

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vi  Airline Revenue Management

9.3.3 Passenger Load Factor Report ............................................................................... 289

9.3.4 Denied Boarding and Spoilage Report ................................................................... 290

9.3.5 Spill and Stifle Report .............................................................................................. 291

9.3.6 Schedule Comparison Report ................................................................................. 293

9.3.7 Historical Demand Report ....................................................................................... 2949.3.8 Revenue Report ...................................................................................................... 295

9.3.9 Forecast Accuracy Report ....................................................................................... 296

Module 10 Product Distribution ........................................................................................................... 303

10.1 Traditional Airline Ticket Distribution .................................................................................... 304

10.1.1 Computer Reservation Systems (CRSs) ................................................................ 304

10.1.2 From CRS to GDS .................................................................................................. 305

10.1.3 Global Distribution Systems (GDSs) ....................................................................... 306

10.1.4 Distribution Costs .................................................................................................... 307

10.1.5 Screen Position Bias ............................................................................................... 308

10.2 Effect of the Internet ............................................................................................................. 31210.2.1 The Customer ......................................................................................................... 312

10.2.2 Airline Websites ...................................................................................................... 313

10.2.3 Other Travel Websites ............................................................................................ 314

10.2.4 Distribution Costs .................................................................................................... 315

10.2.5 Worldwide Perspective ............................................................................................ 316

10.3 Trends in Product Distribution .............................................................................................. 321

10.3.1 Global Distribution Systems (GDSs) ....................................................................... 321

10.3.2 Customer-Centric Product Distribution ................................................................... 323

10.3.3 Best Practices ......................................................................................................... 324

Module 11 A Revenue Management Organization ............................................................................. 333

11.1 People .................................................................................................................................. 334

11.1.1 Managing People in a Revenue Management Organization .................................. 334

11.1.2 Job Descriptions and Skill Sets ............................................................................... 335

11.1.3 Training ................................................................................................................... 342

11.1.4 Team-Building ......................................................................................................... 343

11.2 Business Processes ............................................................................................................. 348

11.2.1 Interaction with Other Departments ........................................................................ 348

11.2.2 Communication ....................................................................................................... 349

11.2.3 Reporting ................................................................................................................. 350

11.3 Building a Revenue Management Organization .................................................................. 354

11.3.1 System-based Revenue Management Organizations ............................................ 35411.3.2 Market-based Revenue Management Organizations ............................................. 358

11.3.3 Multi-functional Revenue Management Organizations ........................................... 360

11.3.4 Designing a RM Organization ................................................................................. 360

11.3.5 Understanding Revenue Management across the Airline ...................................... 361

Addendum - Revenue Management Current and Future

Challenges and Opportunities: A Closer Look ............................................................................... 369

Glossary .................................................................................................................................................. 377

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Aviation Training Program 

Table of Contents vii 

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Aviation Training Program 

Introduction 1 

AIRLINE REVENUE MANAGEMENT

What is revenue management and why is it needed in the airline

industry of today and tomorrow? As competition and various

economic pressures increase, all airlines, full service and low-

cost carriers alike, need to maximise revenue in order to

succeed and grow. As airlines adapt their business processes

and models to meet the current challenges facing the industry,

revenue management provides a number of strategies to help

increase and maximise revenue.

This book provides an introduction to the basic principles,

strategies, and goals of airline revenue management. After

offering a brief history of the airline industry and how revenue

management evolved in response to industry changes, this

book covers a number of topics pertaining to the theory and

practice of revenue management. Several topics address what

could be considered the core of revenue management theory

and practice. These topics are managing passenger demand,

pricing, booking class assignment, seat inventory control,

spoilage management, and group management. The other

topics covered are scheduling and capacity adjustments,

monitoring performance, product distribution, and revenue

management organisation. A supplemental discussion of the

airline industry overall and how challenges and opportunities will

impact revenue management in the future is included in an

addendum to this book.

For learning purposes, the text of each study module assumes

that the reader currently works in a revenue management

position. This course is also appropriate, however, for any

person with an interest in understanding how revenue

management strategies and tools can contribute to the success

and profitability of an airline. People working in airline customer

service, sales and marketing, network planning, or airport

services, for example, may be interested in this course. By

offering a solid overview of airline revenue management, this

course should enhance not only your personal job performance,

but also your ability to support your work team, your

organisation and, of course, your customers.