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Airline Revenue Management - The world is moving forward, do not be left behind

Jeswin-Varghese---The-World-is-Moving-Forward-do-not-be-Left-Behind-Blog

Traditionally, airlines treat seats as commodity, and airline Revenue Management (RM) relies heavily on categorizing them into fare-specific booking classes and forecasting the demand. Seat allocations to the classes are dynamically adjusted based on demand, to optimize revenue, thereby establishing an inventory control-driven dynamic pricing system - a method still widely employed by most airlines.

However, passenger preferences have limited influence in this mechanism, largely due to technological limitations prevalent when this RM approach was devised decades ago. The inability to grasp passenger preferences could lead airlines into unfavourable situations, as witnessed during a recent instance in India. Almost all airlines had to reduce fares in domestic routes during the historically high demand Diwali week [1], in a desperate attempt to sell off unsold inventory, when the forecasted demand surge did not materialize, despite reduced overall capacity owing to the grounding of an airline.

Today, technology has improved significantly, and many industries, especially the e-commerce industry, are leveraging this. Airlines should use the improvement in technology to their advantage by moving away from the traditional 'seat as a commodity' perspective and taking a more customer-centric approach to RM.

What should the future of airline revenue management look like?

The airline RM of the future should place the passenger at the centre of its strategy. The emphasis should be on understanding what each passenger wants, rather than allocating N number of seats to fare class X. While network airlines would still need to factor in revenue optimization at a network level, the preferences of the passenger should be a key parameter in the RM equation.

Today's passengers are accustomed to customer-centric experiences from most businesses they deal with, such as e-commerce platforms like Amazon and digital streaming platforms like Netflix. Consequently, they expect the same level of engagement from airlines.

Airlines should be able to classify passengers into several microsegments and identify the specific segment to which a particular passenger belongs when they shop. Based on this, the airline should be able to offer the products and experiences that passengers want, at prices that are just right for them, while self-learning and optimizing based on real time behavioural feedback from the passengers. All other aspects of revenue management, like overbooking, competition monitoring, network-level revenue optimization etc, should be managed in the background. To do this effectively, airlines should be capable of analysing and making sense of large amounts of data.

Concisely, airline RM philosophy will have to evolve from a "This is what I have for sale" approach to a warmer and more welcoming "I understand your need, and here is my offer that best fits your requirement" approach.

Technology is the key to airline revenue management evolution

As we have already alluded to, the key to making this new approach to airline RM a reality is technology and the required technology already exists, and it is used extensively by several other industries.

The foundation for the shift to the new realm of airline RM is quality data. Airlines must ensure the data they collect is of high quality, including richer sources such as passenger behavioural data on websites. In the prevailing dynamic business environment, understanding the broader ecosystem is crucial. For instance, the situation of airlines during Diwali week in India could have several reasons, and an improved rail infrastructure [2] could possibly be one. Another similar example is that Japanese airlines consider Shinkansen as a competitor in some domestic routes [3]. Collecting and assimilating such diverse data, along with information from competitors, schedules, capacity, holidays, events, and weather, creates a comprehensive dataset for the new RM approach.

Once the data is in place, the next challenge is to analyse and find patterns for meaningful actions. Machine Learning, particularly deep learning models, can aid airlines in processing large datasets to derive optimal pricing or product recommendations in real time. To ensure optimal revenue, capturing and learning from passenger feedback is crucial. Deep Reinforcement Learning can enable airlines to establish a self-optimizing system that continually learns and optimizes using behavioural feedback from passengers, ensuring customer satisfaction, and maximizing airline revenue.

For any major industry transformation, a well-planned change management approach is essential. Shifting to the new airline RM approach is a paradigm shift for airlines, requiring stakeholder buy-in at all levels for a successful transition. Despite uncertainty among airline RM teams about integrating Machine Learning, owing to of lack of confidence or the perception on the costs involved, solutions that leverage ML capabilities and seamlessly plug into existing landscapes do exist. Airlines can explore and try these solutions to assess benefits, implement changes, and gradually transition to a revamped RM approach.

Next steps

At IBS, we are currently running a trial of a new, AI-driven revenue-management solution specifically designed for airlines that leverages the above-mentioned advances in technology. We have already run a successful production trial in partnership with a large airline, and we are looking for more airlines who might be interested in participating in this trial.

Our engineers work with airlines to first implement it in parallel with their existing platforms. We then work with the partner to run the system alongside their current one, in an A/B test. On average, IBS solution has achieved a 2% uplift in revenue.

IBS Software is a leading SaaS solutions provider to the travel industry globally, managing mission-critical operations for customers in the aviation sector.

To speak to our experts about taking part in the trial, or to find out how IBS Software can help you develop the best practices and implement the technologies you need to modernize your revenue management, get in touch today.

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