When it comes to revenue management, there are two competing optimization strategies — origin and destination (O&D) and segments. In this 101 piece, we’ll take a look at the definition of these two approaches and some of their characteristics.
Definition of O&D & Segments
As its name suggests, O&D is the starting point (origin airport) and end point (destination airport) of a traveler's directional journey. For instance, the origin is LHR and the destination is LAX.
However, this doesn’t necessarily mean this is a non-stop flight. The passenger might have to change flights at JFK, for example, before getting to her/his destination of LAX.
By comparison, the segment is each unique flight number within a journey. Using the same example, that itinerary has two segments — flight 100 LHR-JFK and flight 200 JFK-LAX. Notice also that flight 200 JFK-LAX is a two-leg segment consisting of nonstop hops JFK-ORD and ORD-LAX.
O&D is a zoomed out view of a traveler’s journey just looking at the two endpoints, whereas legs and segments zoom in and look at each piece within the journey. The combined picture can be called an ODI (or O&D Itinerary). Airlines with complex networks may have numerous ODIs serving as alternative pathways for a given O&D.
Sometimes traditional leg or segment-based inventory controls are viewed as not being detailed enough for achieving optimal revenue performance. This happens when multiple ODIs are competing for seat inventory on the same leg. Notice in the example above that any seat on JFK-ORD (the 1st leg of flight 200) may be required to construct and sell four different ODIs serving four different O&Ds:
At any point in time during the booking curve, each of those four O&Ds may represent vastly different revenue opportunities within the airline’s network. So, when a travel shopper is offered (and tickets) a priced ODI using one of those JFK-ORD seats, it causes opportunity costs for three other ODIs which would also require that leg.
Our example network above is purposely quite simple, but even in this case, the process of choosing revenue tradeoffs through inventory settings can be less than obvious. If we consider the large scope and scale of major hub-and-spoke networks, the opportunity cost problem can become quite daunting.
Complexities of O&D-Based Revenue Management
In a recent interview with Kambr Media, Benjamin Cany, Head of Offer Optimization, Airlines, Amadeus, discussed O&D strategy and when it should be deployed.
“What is tremendously important for me in revenue management is to understand customer choice behavior, how people are making decisions between the different products. O&D is a component of it, but not the only one. It also depends how many connecting passengers you have in your hub. How relevant is it for a stakeholder?,” said Cany.
Cany goes on to mention because of the challenge associated with an O&D approach, airlines must understand if it fits into their overall business strategy.
“Is it worth having the extra challenge for the analysts to manage the complexity of O&D inventory controls? For large hub and spoke airlines, they can put a 1 to 2% incremental revenue on this functionality. It means hundreds of millions of dollars. Of course, it's worth adding extra complexity for the commercial analysts of the airline revenue management and pricing department,” said Cany.
You may be wondering what some of these challenges are that Cany is referring to. Airline technology company Sabre did a good job laying out some of these challenges in an article on its website.
While they do cite O&D as providing a more holistic view, they also reference connections, codeshares (a commercial arrangement whereby one airline sells seats on a flight operated by another, with each airline using their own flight number) and inter-departmental dependencies as some of the inherent challenges.
More precisely, some of the challenges of O&D-based optimization include:
- Network planning becomes a lot more complex since connecting flights need to be considered for every route.
- This then makes the collaboration between network planning and revenue management inherently more important, as well as sales/marketing and revenue management.
- Codesharing (and the negotiations of codeshares) has a greater emphasis since O&D usually results in a higher volume of codeshare bookings.
- This leads to additional pricing levers and work to manage compared to a segment approach.
- Reporting and analysis becomes more intricate and more complex, depending on the airline’s overarching business goals.
But what inventory approach is best for your airline? This is a far more nuanced topic than what we’ve outlined here in this foundational article. We’ll publish a follow-up which will detail strategies airlines can take based on their distinct business models.