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As airlines strive for more accurate demand forecasting, they find themselves confronted by the very technology implemented to improve revenue management.
In principle, it’s quite simple. By accurately forecasting demand for each route and fare class, revenue managers can adjust pricing buckets to maximize revenue.
Basic supply and demand dynamics suggest – when demand is high and inelastic, higher fares can be deployed. Alternatively, when demand is low but elastic, lower fares should be considered.
However, nothing in commercial aviation is ever so simple. Demand forecasting has always been a challenge for airlines and making this task even more daunting is the very systems revenue managers work with.
System Limitations
While we’ve seen tremendous change sweeping across the world of travel in no small part due to the inception of the internet and mobile phone penetration, some commercial aviation software dates as far back as the 1970s.
Given the lack of innovation, it’s no surprise that revenue management practitioners are unhappy. In an independent poll conducted by Kambr Media, 62.5 percent of revenue managers answered that they are dissatisfied with their current commercial software. Of those respondents claiming dissatisfaction, 60 percent cited old technology as one of the reasons for their discontent.
The resulting effect is that revenue management is becoming increasingly difficult.
"I don’t think [commercial aviation] systems are very good at forecasting demand," said Dr. Tony Webber, CEO, Airline Intelligence & Research.
“The key variable is your ability to accurately forecast demand in each price bucket. I haven’t seen a system that properly incorporates all the variables needed to make this forecast as accurate as possible. Variables like the state of the economy and competitor capacity aren’t often reflected in forecasts. If you can’t accurately forecast demand by price bucket, then the decisions in relation to closing and opening price buckets will be floored. I think this is one of the reasons why airlines did so badly during the GFC (Global Financial Crisis)."
Given the complex nature of forecasting, one area of improvement suggested for revenue managers and revenue management software alike, is the ability to ingest and consider as many variables as possible.
“I think the key is that revenue is extremely difficult to forecast. Most airlines have significant difficulty in doing so,” said Webber. “By virtue of this it is important to consider presenting forecasts as a range and demonstrating how sensitive it can be to certain variables.”
When making these considerations, there are several external variables that sometimes go unnoticed or at the very least are not acted on.
“I would also say that airline groups aren’t good at understanding how the low-cost brand affects the full-service brand. This is incredibly important. Understanding how capacity affects yields is also critical,” said Webber. “Airlines also aren’t good at adjusting capacity in response to fuel price shocks and integrating the network capacity decisions with their revenue management decisions because these must go together.”
Application Error
While some feel that commercial aviation systems are old and ill-equipped for the demands of today’s revenue management, others point to a different problem these systems present. On the contrary, these systems are too complicated, resulting in user error.
“I disagree with the notion that legacy systems are why airlines struggle with demand forecasting,” said Judson Rollins, an airline industry consultant. “If anything, RM systems have reached a level of ‘over-sophistication’ that make them too difficult for the end user to understand – which means that the end user, a RM analyst, spends his or her time ‘rigging the black box’ to make it produce an outcome (fare availability posture) that seems credible and defensible to his or her management.”
Many of these systems require high learning curves that airlines simply don’t have the time or the patience to invest in. Instead of taking the time to learn best practices and onboard employees, a plug and play mentality is exercised
Rollins has experienced this firsthand, saying, “most airlines I've worked with simply plop a new hire into a chair and have them start using the system directly on day one, which results in ‘trial and error’ training – with live markets and revenue!”
Although there are many poor executions, not every airline is falling on its face when it comes to demand forecasting. Rollins offers up tips on how to derive accurate forecasts.
“The airlines that are most successful with demand forecasting and revenue management are the ones that either a) build their own systems in-house for maximum flexibility and customization to their particular needs or b) invest time and money in ensuring that every member of their teams thoroughly understand how the systems are designed and how to use them properly.”
Don’t Forget About Ancillaries
To make matters worse, the trend toward unbundling means that forecasting base fare demand no longer captures the entire revenue expectation associated with a booking.
“With the unbundling revolution, we know that each booking opportunity must be assessed not just for its fare level, but for the sum of its follow-on revenue component potential,” according to Chris Anthony, Managing Director, Kambr Advisory.
“That means each booking’s value within the system should also reflect the ancillary revenue tail that is likely to come later from seat assignments, baggage fees, and others. None of the RM forecasting systems currently available clearly draw such inferences, but the clues needed can be found within shopping data and the future will see those insights folded into the forecasting process.”
Yet another variable to consider is when and how ancillary purchases are being made. Webber sums it up quite well.
“I think it is different for the at-booking ancillaries and the in-flight ancillaries. With Pre-booking ancillaries like seat selection, insurance, extra baggage, etc., passengers can respond by deciding not to travel if these fees are too high, but in-flight they are captured. Given the in-flight ancillaries are a captive audience they will price closer to monopoly levels than at-booking ancillaries.”
As for looking ahead to the future of revenue management, success lies at the intersection of user experience and data analytics. The technology vendor that can provide these crucial elements to an airline will be well positioned for not only its own success, but will propel the industry as a whole forward.
"When a RM system becomes excessively sophisticated, the value of that solution quickly diminishes as analysts stop using it as designed,” said Rollins. “RM solution providers can help this by creating intuitive user interfaces and optimization engines that are comprehensible to users at nearly any level of experience.”
