Assessing the Role of RM in Ensuring Financial Success of an Alliance in the Aviation Industry

Generally, strategic alliances in the aviation industry are considered as an option to enhance service and for a single-carrier access to a stronger network through strategically located hubs.

Other than net cost synergies, airlines when they merge also talk about revenue synergies.

In order to get a perspective of a revenue management professional about strategic alliances, EyeforTravel’s Ritesh Gupta recently spoke to Melissa Skluzacek, Director – Forecasting & Operations Research, Frontier Airlines, who is scheduled to speak at the forthcoming Travel Distribution Summit North America 2010, to be held in Chicago (13-14 October).

Melissa believes that some of the revenue synergies from merging airlines come from an enhanced route network and better overall brand presence. In regards to alliances, she feels that revenue management should be heavily involved in the class mapping process both at the negotiation phase of an alliance and throughout the life of the alliance.   

Melissa also spoke in details about some other aspects. Excerpts:

On revenue management technical aspects: 

I believe that one of the most important things a revenue management department can do to ensure the financial success of an alliance involves class mapping.  The class mappings are generally agreed upon during the contract negotiation phase of a codeshare agreement.  In many instances, you are limited to the number of class mappings you can have, so the revenue management (or alliance) department has to determine which routes will be most utilised in the alliance and the revenue associated with each of the flows across these routes. It is important to spend the time in the beginning to do this well. A poor class mapping will hurt the success of the codeshare: in some cases, you will unnecessarily limit the availability provided for codeshare passengers, thereby reducing the codeshare benefits. Conversely, too generous of a mapping  will dilute revenue as you will accept itineraries that provide less revenue than others. 

Once the codeshare is in place, having “in sync” availability is key. Ideally, the marketing flights should have the exact same availability as the operating flights, especially when showing in the same distribution channel.

Other things that must be considered going forward from an revenue management perspective include accurate optimisation fares that reflect the true revenue received with codeshare, adjusting demand to reflect new demand patterns generated from the alliance, flight firming that encompasses codeshare bookings, and good codeshare reporting. 

Optimising revenue synergies:

Depending on the merging airlines’ networks, the biggest revenue synergy comes from an enhanced network and better overall brand presence:

1. More destinations

a. Increases customer loyalty because combined carrier is more likely to fly to more of the destinations customers want

b. Can enhance feeder routes because more destinations to feed to

c. Increased connecting traffic

2. Greater exposure / larger customer base – the two merging carriers presumably have many differences in their customer bases (geography, customer type, etc.). 

If one carrier has more of a West Coast presence and the other carrier has more customers based in the Midwest, the merged carrier has much more exposure throughout the country.  Also, different distribution channels can have different customer bases.  When carriers get more different types of customers, more distribution channels may become appealing.  All of this leads to more demand to manage. 

These revenue synergies can change the revenue management picture dramatically:

1.   More connecting traffic?  If the carriers are utilising leg-based RM, it may be time to consider the revenue benefits of some sort of O&D control. 

2.   How do demand patterns change with the new network (e.g., different booking patterns and / or seasonality)

3.   Do fares need to be restratified?  Probably want to do this shortly after the carrier merges and then redo after the carrier is fully merged. 

Challenges:

1.  I believe that ancillary fees / fare families, present the biggest opportunity for revenue management today. 

Revenue Management typically looks at the ticket price a passenger is willing to pay and does not consider the total revenue package.  Today, ancillary fees represent a substantial revenue stream for a number of airlines and should be included in the revenue management decision.  In some cases, it may be more revenue positive to accept a lower ticket price because a customer will buy more in ancillaries than a higher ticket price customer.  In other cases, this may not be true.  To my knowledge, there is no formulaic way to make these decisions real-time in the airline industry. 

Overcoming this challenge will require a cooperative effort throughout the company and with some help within the whole industry.

First of all, the company has to determine the ancilliary selling model that maximizes revenue for that airline’s business.  Secondly, there needs to be a way to easily identify ancillary services purchased both in advance and time of booking within the PNR so that this data can be easily fed into the RM system.  Finally, we need to find models to maximise total revenue given the information listed above. 

2.  Another ongoing challenge I see is managing revenue in “lightly fenced” pricing environments.  While many revenue management systems have developed more “elasticity-based” forecasting and optimisation, I do not believe we have adequate business processes and performance measurements in place to use these new methods (and enhance the sciences) to their utmost potential.  

In order to continue to improve in this area, we need to find RM metrics that truly measure RM’s performance in these types of pricing environments. 

On new revenue management options that a joint corporation venture offers:   

When two companies come together, the combined organisation has the opportunity to substantially improve the revenue management department.  

If the two companies have different revenue management systems, the selection process to determine which RM system to use provides a great chance to truly understand the functionality and science of each of the systems.  Next, you should be really openminded when combining two revenue management departments.  Now is a great opportunity to evaluate business processes, data / reporting, and organisational structure to develop a better department.  Both carriers probably have areas in which they excel – take the best aspects of both carriers.  

Travel Distribution Summit North America 2010

Melissa Skluzacek, Director – Forecasting & Operations Research, Frontier Airlines, is scheduled to speak at the forthcoming Travel Distribution Summit North America 2010, to be held in Chicago (13-14 October). The two-day event will feature over 80 speakers, including the ones from Hilton, Wyndham, Travelport, Lufthansa, Expedia, Google and from many other such organisations of repute.

For more information, click here:

Or contact:

Marco Saio

Event Director

[email protected]

0044 (0) 207 375 7219

Or

Rosie Akenhead

Event Director

[email protected]

0044 (0) 207 375 7229