1. 1 Maximizing Revenue with a Leg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Management

2. 2 Revenue Management Goal  To achieve the goal of increased revenues, the value of each ticket sold must be known with some certainty Generate increased revenues by seeking to accept the highest paying mix of passengers Generate increased revenues by seeking to accept the highest paying mix of passengers

3. 3 A Perfect World  One flight leg  One fare per booking class u Y = 800 u M = 600 u B = 500 u Q = 350

4. 4 Perfect Fares Fare Class Y Y M M B B Q Q 200 400 600 800 1000 800 600 500 350

5. 5 Fares in Reality Fare Class Y Y M M B B Q Q 200 400 600 800 1000 Fare Range

6. 6 Where Does Fare Variation Come From? Source 1: Distribution Channel

7. 7 Where Does Fare Variation Come From?  Source 1: Distribution Channel Y class tickets on flight 111 may sell for different fares because of distribution channel Inventory Travel Agencies Tour Operators Corporate Accounts Code Share Arrangements Internet Sales Internet Sales Internet Auction Frequent Flier Programs Alliances

8. 8 Distribution Channels: Front End or Back End Fare Control?  Front End Fare Control u Make sure fares align across distribution channels when they are established  Back End Fare Control u Assume fares will not be aligned, and account for differences when a purchase request arrives Front End Back End

9. 9 Front End Fare Control  Good front end control is extremely difficult to achieve, but is the only alternative for carriers in a non-seamless / leg environment u How to assure that all Y class tickets on flight 111 sell for approximately the same price?

10. 10 Back End Fare Control  Seamless availability / O&D provides the opportunity to address many distribution channel issues from the back end u Dynamic fare calculation at time of request: assigning the right fare to each transaction

11. 11 The Value of Back End Fare Control  The worse fair alignment is on the front end, the greater the impact of back end fare control  Back end fair control can have a major revenue impact % Below Upper Bound Quality of Front End Fare Alignment

12. 12 Simulation  Purpose: u To simulate the effects of poor fare class rationalization  Simulation details: u Eight itinerary/fare classes u Four fare class scenarios established by setting upper and lower limits on fare class fares u Top fare for each itinerary established from network data u Within each fare class, each fare value between the upper and lower limit is equally likely

13. 13 Where Does Fare Variation Come From? Source 2: Leg Control

14. 14 Where Does Fare Variation Come From?  Source 2: Leg Control Fares are provided at the O&D level, but availability is controlled at the leg fare class level u Flight networks greatly complicate the process of defining leg fare class fares

15. 15 ELPIAH STL MSY 400 800 700 Leg Control Fare Variation: The Problem  Example Y class fares on a simple network

16. 16 Leg Control Fare Variation: The Problem  Y fare tickets on the leg ELP-IAH take on the values 400, 700, and 800 – a wide fare variation Should these fares all be assigned to Y class? Should these fares be reassigned to different classes that reduce the fare variation? Should these fares all be assigned to Y class? Should these fares be reassigned to different classes that reduce the fare variation?

17. 17 ELPIAH STL MSY 400 800 700 Leg Control Fare Variation: The Problem  Fare class realignment may be required Reassign to M Class Reassign to B Class Leave in Y Class

18. 18 Fare Class Rationalization  Very Important Fact: Fares throughout the network must be aligned within fare classes if leg control revenue management systems are to function properly  Very Important Fact: Fares throughout the network must be aligned within fare classes if leg control revenue management systems are to function properly  How can this be achieved?

19. 19 Network Optimization for Fare Class Rationalization  Assign O&D fares to fare classes so that a leg control revenue management system generates maximum revenue  Determine leg fare class fares for leg optimization algorithms  Adhere to all business constraints

20. 20 Observations  The myriad of business constraints leads to an extremely challenging problem that is not easily handled by an optimization algorithm alone  If fare class rationalization is not addressed, even a good leg revenue management system can be severely compromised  Fare class rationalization is an important aspect of aligning fare classes within an alliance

21. 21 Fare Class Rationalization: The Wrong Way  Ordering O&D values from highest to lowest fare value and clustering to form fare classes is a poor idea

22. 22 Fare Class Rationalization: The Right Way  O&D valuation should incorporate some measure of displacement cost  Good leg fare class fares must be determined

23. 23 A Process For Fare Class Rationalization: Getting to Leg Class Fares  In the case of the ELP-IAH-STL itinerary, it is incorrect to attribute a revenue of 800 to the ELP-IAH leg since the itinerary uses two legs  The situation is the same for the ELP-IAH-MSY leg

24. 24 A Process For Fare Class Rationalization: Getting to Leg Class Fares  A way of addressing multi-leg fares is to prorate the O&D fare to the legs

25. 25 800 200 600 800 300 700 A True Proration A Pseudo-Proration A Process For Fare Class Rationalization: Getting to Leg Class Fares  Important Fact: There are mathematically based ways to prorate itinerary fares into leg fares; itinerary fares can then be treated as consisting of leg fares for purposes of fare class rationalization  Important Fact: There are mathematically based ways to prorate itinerary fares into leg fares; itinerary fares can then be treated as consisting of leg fares for purposes of fare class rationalization

26. 26 A Process For Fare Class Rationalization: Getting to Leg Class Fares  With fares prorated to legs, it is possible to determine good leg fare class fares by taking a weighted average of the prorated fares within the fare class  Prorated fares still have the likely problem of being poorly rationalized at the leg level

27. 27 A Process For Fare Class Rationalization: Getting to Leg Class Fares  Proration alone does not solve the problem of fare class rationalization ItineraryY Fare Prorated Fare for ELP-IAH Leg ELP-IAH400 ELP-IAH-STL800100 ELP-IAH-MSY700425  Itineraries ELP-IAH and ELP-IAH-MSY align well on leg ELP-IAH-MSY, while itinerary ELP-IAH-STL does not

28. 28 A Process For Fare Class Rationalization: Getting to Leg Class Fares  Proration does suggest how fare class rationalization might be achieved ItineraryY Fare Prorated Fare for ELP-IAH Leg ELP-IAH400 ELP-IAH-STL800100 ELP-IAH-MSY700425  Y Class:ELP-IAH and ELP-IAH-MSY  M Class:ELP-IAH-STL

29. 29 A Process For Fare Class Rationalization: Getting to Leg Class Fares  The problem with rationalizing fare classes on one leg is that the rationalization may not make sense for other legs

30. 30 A Process For Fare Class Rationalization: Pseudofares  Pseudofares are one method of prorating itinerary fares to leg fares Pseudofare k ( 1, 2,…, k,…, m ) = Fare( 1, 2,…, k,…, m ) – Displacement Cost ( 1, 2,…, k,…, m ) + Displacement Cost ( k )

31. 31 A Process For Fare Class Rationalization: Pseudofare Example 800 300 700 100 500 Displacement Costs 800 – 600 + 500 800 – 600 + 100

32. 32 A Process For Fare Class Rationalization  Pseudofares provide a good alternative for performing fare class rationalization at the leg level ItineraryY Fare Displacement Cost Adjustment Pseudofare for ELP-IAH Leg ELP-IAH4000 ELP-IAH-STL800700100 ELP-IAH-MSY700275425

33. 33 A Process For Fare Class Rationalization  Important Fact: Pseudofares have the special property that they preserve order under fare proration to different legs  This special property of pseudofares makes them ideal for the purpose of fare class rationalization

34. 34 Ultimate Fare Class Rationalization  Fare class rationalization is a front end fare control solution u Seeks to align fares so that the allocation of inventory through leg fare class limits yields revenue maximizing decisions  Can leg fare classes ever be fully rationalized?  Is it possible to achieve a perfect world in which every ticket sold in a leg class has the same fare?

35. 35 Ultimate Fare Class Rationalization  The Bad News u Restricting inventory control to availability in leg fare classes, the answer is no; a perfect world cannot be achieved u Fare class rationalization is necessary to get the most from a leg control system, but there are inherent limitations

36. 36 Ultimate Fare Class Rationalization  The Good News u Stepping outside of leg fare class control to O&D control, a perfect world can be achieved u Leg level Displacement Adjusted Virtual Nesting, for example, is the obvious and inevitable resolution of the problem of trying to rationalize fare classes s Fare class rationalization is simply thrown out the window and replaced by leg value buckets u Bid price methods achieve the same goal in a more sophisticated fashion

37. 37 Conclusions: Distribution Channel  Fare variation as a result of different fares in different distribution channels is a huge problem that must be addressed  The move to seamless availability / O&D control opens up substantial opportunities for revenue improvement through back end inventory control  Without seamless availability / O&D control, airlines must be diligent in aligning fares on the front end

38. 38 Conclusions: Leg Control  In a leg control environment, it is vital to have fare classes rationalized at the network level in order to achieve maximum revenue gains from a leg control revenue management system  Good fare class rationalization is difficult and has inherent limitations  O&D control overcomes the limitations inherent in a leg control revenue management system

39. 39 Maximizing Revenue with a Leg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Management