Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS Reservation and Yield Management Study Group Annual Meeting, Bangkok, May 8 - 11, 2001 Natascha Jung Senior Operations Research Specialist Klaus Weber Senior Scientific Analyst

Presentation on behalf of my colleague Natascha ... and her boss

Agenda Motivation Booking Classes Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Outlook / Conclusions

Motivation The Customer Typical Travel Agency Situation? I see, ... Are you looking for a last minute offer? Do you have any idea when and how you would like to fly? I would like to book a flight from Bangkok to Rio de Janeiro. No, ... Yes, I would prefer a three leg itinerary via Frankfurt and Madrid. That’s not important! I just like to travel in M class ... I mean, from BKK to FRA in M, and then H class to MAD. But for transatlantic flights I prefer class Q!! travel agent customer

Motivation The Customer (cont.) Typical Travel Agency Situation? Do you have any idea when and how you would like to fly? I understand. You need a comfortable seat with power supply for your laptop. If you don’t mind the risk of thrombosis N I can offer you a discounted fare in Eco? I would like to book a flight from Bangkok to Rio de Janeiro. I am going to take part in the annual meeting of Nobel laureates which starts next month and will take 8 days. Oh, no! I just like to sit and think about a new formula. Great! I take it! travel agent customer

Motivation The Customer (cont.) Resume Customer does not care about booking classes! Customer demand depends on Travel day Prices (offered at ticketing day) Service Restrictions (minimum stay, day application, ...) fares Demand is controlled by fares, i.e. customer needs! Revenue management systems Forecast is estimated on basis of historical demand Booking histories are stored w.r.t. booking class! !!! Contradiction !!!

Agenda Motivation Booking Classes Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Outlook / Conclusions

Booking Classes Historical Review Historical Development of Revenue Management at Lufthansa 1955 Central Reservation 1965 Overbooking 1972 Currency Control 1977 Segment Pricing 1989 Fare Mix / Control 1994 Network Management / Bid Pricing 1972 Littlewood’s rule 1989 EMSRb Booking classes Currency Control: Lower availability for countries with weak currency. Network Management: Availability concerning Routing and Point of booking. A passenger flying from A to B to C is maybe paying less than a passenger just flying from B to C.

Booking Classes Why Booking Classes? Revenue management point of view Booking classes reflect ‘somehow’ the customers’ will to pay booking classes are the basis for demand forecast Reservation systems use them to indicate availability However, there are other means to reflect customer will to pay (fares) compute customer demand (customer choice model) We do not truly need booking classes but we are used to use them.

Booking Classes Why Booking Classes? (cont.) Pricing point of view Booking classes are not important at all Only fares are important! Fares are richer in information than booking classes

Booking Classes Problems with Booking Classes Booking classes are inaccurate, e.g. Quite different fares in same booking class Distortion of average revenue of booking class Another indicator Booking class harmonisation in airline alliances usually increases number of booking classes

Booking Classes Problems with Booking Classes (cont.) RM systems forecast on historical data !!! Meanwhile fares might have been changed !!! Different demand Different average values of corresponding booking classes

Booking Classes Booking Classes - pros and cons Booking classes cons History building for demand forecast (generally possible for fares as well, however: too many fares) Bid price control requires calculation of bid prices Booking class protects not necessary Booking classes only indirectly used for BP calculation Booking class corresponds to class value (‘somehow’) Booking class can be identified with restrictions (‘somehow’) Inexactness of booking classes restricts opportunity of additional revenue gain ... in 0.1 % range (which are millions of € or $) ‘approximation’ inexact, but works

Booking Classes Booking Classes - pros and cons (cont.) Booking classes cons ‘customer pricing’ (priceline.com, tallyman.de) shows Booking classes are not necessary !!! Approach not generally applicable to airlines !!! restrictions (not refundable) are necessary to avoid down selling not possible to sell ‘open tickets’

Agenda Motivation Booking Classes Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Outlook / Conclusions

Price Elasticity Model Pricing & Revenue Management Overview: Pricing System - Price Elasticity Model Trigger Fare Change Price Elasticity Model Output Demand Shift Fare Analyser Market Share Model Competitor Reaction Analyser Traveller Preference Analyser Market Stimulation Model

Pricing & Revenue Management Overview: Revenue Management System O&D Forecast Engine O&D Optimiser Forecast Interface DB Optimiser Interface DB Inventory GDS ... Forecast Building Demand Forecasts Control Parameters

Pricing & Revenue Management Comparison Target level (What shall be controlled?) Market - OD origin destination Fares given on this level. ODIF POS origin destination itinerary fare class point of sale Booking values given on this level. customer oriented Value / revenue oriented coarse level fine level Target quantities (Which quantities are focused on?) Market size Market share Fares ODIF POS demand ODIF POS values marginal seats revenues bid prices

Pricing & Revenue Management Comparison (cont.) Target quantities (Which quantities are focused on?) Market size Market share Fares ODIF POS demand ODIF POS values marginal seats revenues bid prices Linking both spheres means replace booking classes in RM sphere by fares (properly) integrate both spheres

Pricing & Revenue Management Requirements for Integration Current Demand Forecast Booking histories Current booking level Booking classes Booking classes PNR

Pricing & Revenue Management Requirements for Integration Integrated Demand Forecast Booking histories Current booking level Fare buckets fares clustered with respect to value / revenue restrictions Fare buckets ??? Source ??? fare In the future? ... together with other usefull, quantities, e.g. bid prices fare (inexact) Why buckets? Optimisation requires competition among customers for same seat Why not take fares, i.e. one fare per bucket? Too many buckets Pricing DB class info restrictions etc.

Pricing & Revenue Management Requirements for Integration (cont.) Bookings Fare buckets Example Value 900 - 1100 restriction sunday return advanced purchase 14 days ... av. value no. of bkgs. For optimisation we need to forecast the number of bookings in each fare bucket.

Agenda Motivation Booking Classes Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Outlook / Conclusions

Integrated Approach Pricing & RM Price Elasticity Model Forecast of demand for each fare bucket - step 1 Data sources Utility factors Competitor Reaction Analyser Market Share Model Market Stimulation Model Price Elasticity Model Traveller Preference Analyser Alternative Customer choice model multinomial logit model customer’s choice depends on amount minimum stay advanced purchase ... Internal fare data ATPCO MIDT Separate for business and leisure passengers

Integrated Approach Pricing & RM Market Size Forecaster Forecast of demand for each fare bucket - step 2 Data sources MIDT ATPCO Internal fare data Forecast basis Demand forecast Market Size Forecaster Current bookings

Integrated Approach Pricing & RM Fare Buckets Forecast Forecast of demand for each fare basket - step 3 Price Elasticity Model Per ticketing/travel combination Per departure date ... av. value no. of bkgs. Fare buckets Market Size Forecaster

Integrated Approach Pricing & RM System Overview O&D Optimiser Forecast Interface DB Optimiser Interface DB Inventory GDS ... Market Shares Demand Forecasts Control Parameters Market Size Forecast Price Elasticity Model Market Size Bookings with Fare Information

Integrated Approach Pricing & RM Demand Changes Re-Optimisation Previous è New Forecast Previous Forecast Demand Shift Current Demand Demand Shift Price Elasticity Model Learning Fare Change Floating dcp Snap shot

Agenda Motivation Booking Classes Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Outlook / Conclusions

Outlook / Conclusions Outlook - Mining PNRs Business passengers behave different from leisure passengers Separate customer choice models Problem: Identification of passenger types history data current booking data ü Fare information available (insufficient?) !! PNR may not contain fare information! Mine PNR data to decide to which type passenger belongs to e.g. pax travels single ... or with family pax is frequent traveller ... PNR

Outlook / Conclusions Summary Booking classes are inaccurate w.r.t. amount of fares contained are not used directly in O&D bid price control Booking class-based forecast reflects historical customer choice only does not concern current market changes Booking class-oriented revenue management systems are sophisticated (O&D control) work well may not exhaust the full potential of RM control!!! There is need for strong integration of Pricing and RM

Outlook / Conclusions Summary Gap between pricing and revenue management could be closed by replacement of booking classes by fare buckets by forecast concerning market size market shares Integrated approach to pricing and revenue management manages demand changes Challenges Inventory changes Information provision Good experience with pricing NetLine/Price pricing simulation NetLine/Price:PSM pax demand forecast for scheduling NetLine/Plan Interested airlines are kindly invited for proving the concept

Thank you for your attention! Any questions? 1