Airline Revvenue Management

Air travel has developed into the main form of transportation this century and its demand will double in the next 20 years. In order for airlines to maintain their profitability, they have turn to airline revenue management. Ever since deregulation, airlines have adopted this system to maximize revenue and profitability. What exactly is revenue management? Is a system designed to take advantage of the market, by segregating the market population into different categories of consumer needs, income, and overall behavior of the consumer. Through this process airlines carriers enhance product availability and price to maximize revenue.

Airline revenue management implementation occurred shortly after deregulation. Since, the government discontinue its control over air routes and fares, airlines had to find a way to maintain and sustain their profitability. The first airline to introduced revenue management was none other than American Airlines. In 1985 and with pressure from low-cost carriers such as People Express, American airlines opted for a computerized approach to inventory allocation. This was the birth of revenue management in airline industry. Furthermore, American’s Sabre Airmax, the first RMS computerized system was born. In the first three years of its usage, American’s Sabre Airmax contributes with an extra $1.4 billion dollars of revenue.

In order for revenue management to be successful, four fundamental conditions must be met. The first requires a permanent amount of supply available for sale. Meaning, a fixed amount of seats per aircraft should be available per route. Second, resources sold must be perishable. Seats are a perishable items, if not sold they terminate without value. Third, the most vital portion of r...

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... demand as a function of marketing variables, such as price or promotion. These involve building specialized forecasts such as market response models or cross price elasticity estimates to predict customer behavior at certain price points. By combining these forecasts with calculated price sensitivities and price ratios, a Revenue Management System can then quantify these benefits and develop price optimization strategies to maximize revenue.

There are different types of revenue management, some examples include fare class yield management, Heuristic bid price, Displacement Adjusted Virtual Nesting and probabilistic Bid Price.

Fare Class Yield Management is a leg based inventory control revenue management. It’s a top - down approach, giving the highest class the most protection, then the next class and so on until all seats have allocated to a fare class.