TRANSFORMATIONAL STRATEGIES for Network Design and Revenue Management — By Nawal Taneja

DISCLAIMER NOTE; this is not my primary content of ownership, but rather a sharing of another’s work. All rights reserved, alongside many thanks to CAPA and Mr Taneja for such insightful opinions.

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IT IS CLEAR THAT AIRLINES know and understand the rationale and value for fundamental transformation. However, when it comes to actual changes, the strategies tend to be (a) incremental in nature rather than transformational, and (b) relatively slow in the timing of their implementation. Both aspects are understandable given that (a) airlines operate within a complex web of regulations and other externalities, some of which are unique to the airline sector, and (b) the time it takes to bring an adjustment to the conventional mindset is arduous. An example of the second challenge is while management typically has a clear understanding of the process to evaluate investments in physical aviation assets (an aircraft, an expansion to the facilities at an airport or in the maintenance department) the process for evaluating soft assets is not so well defined. For instance, it is difficult for airline management to evaluate investments required for establishing an open-access platform, comprehensive and dynamic data, advanced analytics for customer and business intelligence, and smart apps to enable an airline marketing group to access more passengers and to engage with them. All these investments would leverage software to move the airline from providing a product service to providing a product experience. In light of these two challenges— complexity of the airline business and the soft asset evaluation process—the range of strategies being implemented has related more to the management of parts that are under some control than game-changing initiatives. One example of such an initiative could be to form relationships within the broader travel ecosystem for an airline to become a mobility solution provider. However, while working within the constraints of the two challenges mentioned, it is still possible to implement step-changing transformational strategies to re-align networks with focus on design and to upgrade revenue managements systems by making them more dynamic from a competitive point of view. Let me start with network and schedule planning as this is clearly the heart and soul of airline planning.

Skilled and experienced airline managers work with numerous sophisticated planning systems and rich data to conduct these critical and complex processes. However, not only has the process become more complex, but the increasingly dynamic nature of the marketplace now calls for much more agility. For example, the process to identify the optimal set of codeshares has become far more complex given the increase in the number of partners (at the strategic, equity, and interline levels) and an increase in the number of flights. Yet, airlines cannot increase the number of flight digits from more than the conventional number of four digits. And the number of slots available at key airports limit the decision on the number of flights to be codeshared. However, sophisticated slot and codeshare evaluation and management systems are now available to achieve optimization at the enterprise level while working with multiple strategic and interline partners.

Although airlines do make use of sophisticated systems for different aspects of network and schedule development (and now some are even using the slot evaluation systems) it has not been possible until recently to conduct the analyses through the use of an integrated system. Deploying increasingly sophisticated individual airline network and scheduling components can produce incremental benefits in costs and or revenues. But it is the capability to work with an integrated system, including new components (such as slot and codeshare evaluation) that will lead to a step change in benefits of costs, revenues, and, finally, an increase in agility. Airline network, schedule, and fleet assignment can now be designed with simultaneous consideration of market and route forecasts, slot and codeshare considerations and all the conventional operational feasibility considerations (crew, maintenance, airport ground operations and gates). It is the ability to work with a system at the integrated level that will reduce the size of the planning team and enable all members to work with consistent data and assumptions to answer the what and if questions much more accurately and quickly. Agility can also be increased by working with real cost data at a much more detailed and granular level from the finance department. Typically, flight forecasts are made using average costs in multiple areas. Take, for instance, costs of operating a flight at a congested and slot-controlled airport. While using average costs for evaluating a flight under consideration may have been adequate at the planning stage, it is now possible to compute the actual flight profitability with real data before and very soon after operations begin. What was the cost of the specific slot used for the flight? What were the costs invoiced by the ground operations vendor for handling the flight at an unusual departure or arrival time? Knowing real costs at granular levels, and in almost real time, will provide meaningful insights into the profitability of new flights so that effective adjustments can be made— changes to departure time, frequency, codeshare, and so forth—very quickly and not months later.

As with designing the airline network and schedule not just more efficiently but more effectively it is now becoming possible to achieve step changes in the management of airline revenue. No question about it, revenue managers have been squeezing more and more value in increments. Examples include, moving from leg-based systems to origin and destination-based systems, to broader network-based systems, to the inclusion of codeshared flights, and now, while just beginning, to the inclusion of ancillary revenues. These evolutionary movements have been extremely positive. However, emerging new generation revenue management systems have the potential to bring about transformational, not incremental, changes. Let me start with what I said in my column ‘Airline Business Transformation: From Revenue Management to Retailing’ in Airline Leader Issue #25. Optimisation needs to be based on not just input from inventory and prices but also from ancillary product sales and loyalty. Since the publication of that column (in Nov-2014) I have elaborated on three points.

First, the inclusion of loyalty does not mean personalisation at an individual customer level but only customer segmentation at an individual’s trip level. In other words, attributes are based on a trip not on an individual person. Second, customers fitting into identified and targeted segments can be made bundled offers to maximise ancillary revenue. And, third, optimisation has to be made in the context of the distribution channel. Finally, it is now possible to move from using tactics at a dynamic level within an airline’s own system to using tactics at a dynamic level within an airline’s competitive environment. Clearly, revenue managers continuously change inventory by flight based on the demand level and the rate of change in the demand. And up to a point even prices within the conventional Reservation Booking Designators (fare buckets or booking classes) are subject to change. However, it is now possible to develop tactical moves based on the use of competitive dynamic pricing and competitive dynamic inventory. Think about it. If market intelligence shows that a competitor of airline X, say airline Y, has closed the availability of seats in a particular booking class in a given market, then why should airline X keep selling at the published fare for its still open booking class? Moreover, even if a booking class is still open for both airlines X and Y, why shouldn’t airline X offer a small discount for its seats? The published fare would still remain the same. Systems are now becoming available to accommodate competitive dynamic pricing and competitive dynamic inventory. There is no argument that almost all airlines operate in a very complex environment and have to work with legacy systems and rules. And while airline leadership is well aware of the transformations taking place in other business sectors, including at the digital level, the leadership at airlines has experienced various levels of resistance, based on both the conventional thinking as well as the risks involved, to implement transformations discussed in the general media at the conceptual level. However, as I point out in this column, it is possible to achieve step changes in the effectiveness of the initial design of networks and schedules using contemporary systems that work with more robust data and an integrated perspective as well as revenue management systems that achieve optimisations based on competitive dynamic pricing and inventory control. And dynamic redemption is not far behind

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