How Airline Revenue Management Strategies Can Benefit Other Industries
Over the last 30 years, the airline industry’s revenue management strategy has evolved into a more customer-centric model. It all started in the early 1980’s when low-cost carriers (LCC) entered the market, offering customers extremely lower fares and exceptional conveniences. While passengers were thrilled, major airline carriers faced a major challenge: maintaining a competitive edge without losing long-term customers to the LLCs. The key was getting customers to pay the highest price possible for each flight.
British Airways was the first major airline to adopt a revenue management strategy. Now, all airlines use similar strategies which utilize revenue management optimization software programs to create dynamic pricing for customers based on competition, inventory, destination, etc. Instead focusing on “seats” as inventory, airlines now focus on “customers.” The complex mathematical algorithms that make up the revenue management programs utilize historical data analytics to predict customer behavior and “willingness to buy.” To determine profitable plane ticket prices, airlines use a sliding scale involving price, inventory, marketing and various sales channels. This process creates a sales strategy that allows airlines to consistently set prices according to what the market deems appropriate rather than setting fixed prices. This is why, as consumers, we find our flights are usually full or pretty near capacity.
Many airlines have also implemented corporate partnerships which increase opportunities of keeping flights full. Airlines with regular flights to and from certain cities create frequent flyer businesses in both cities promising a given number of seats at a discounted price. Some agreements state the corporations are responsible for buying a certain number of tickets even if they go unused.
The Future of Airline Revenue Management Strategies
One shortcoming of the airline industry’s revenue management systems is that they all focus solely on inventory, customer behavior, and destinations. They don’t account for potential revenue from ancillary purchases made before, during, and after flights. Some of those items include:
- Priority seat upgrades
- Baggage fees
- In-flight purchases for food, alcohol, and entertainment
These are all included in customer revenue, so revenue management strategies would benefit from updated algorithms to include bundled packaging along with customer loyalty programs.
Implementing Revenue Management Strategy in the Hospitality Industry
The pricing strategy has been an effective way for major airlines to remain competitive in an industry where LCCs have grown exponentially over the past thirty years. Other industries could benefit from implementing similar programs. Take the hospitality industry, for example. Similarly, it struggles with pricing and inventory management in a very competitive industry. Instead of seats, they have rooms. However, in both industries, time remaining to sell inventory and competitor pricing are both integral pieces of a pricing strategy.
Hotels generally set a fixed price for a room when occupancy is below 50 percent and increase prices after that point in order to increase revenue. The result often leads to a slowdown in sales, making it difficult to reach 100 percent occupancy. Airlines, on the other hand, use revenue management strategies which constantly analyze market activity to determine customers’ “willingness to buy” and what they will likely pay.