What is revenue management and why is it needed in the passenger transportation industry of today and tomorrow? Revenue management first appeared in the carrier industry starting in the early 1980s. It arose from the need for accurate demand estimates and resource allocations in the newly deregulated environment. Therefore we begin this book and this module with a look back at the main causes and consequences of carrier deregulation in North America. The second section is an introduction to the basics of revenue management and will serve as a foundation for the rest of the modules in this course. In the final section, we look to the future and consider how the internet is changing ticket distribution and some of the challenges and opportunities that it has created.

This is the first comprehensive introduction to the concepts, theories, and applications of pricing and revenue optimization. From the initial success of "yield management" in the commercial airline industry down to more recent successes of markdown management and dynamic pricing, the application of mathematical analysis to optimize pricing has become increasingly important across many different industries. But, since pricing and revenue optimization has involved the use of sophisticated mathematical techniques, the topic has remained largely inaccessible to students and the typical manager. With methods proven in the MBA courses taught by the author at Columbia and Stanford Business Schools, this book presents the basic concepts of pricing and revenue optimization in a form accessible to MBA students, MS students, and advanced undergraduates. In addition, managers will find the practical approach to the issue of pricing and revenue optimization invaluable. Solutions to the end-of-chapter exercises are available to instructors who are using this book in their courses. For access to the solutions manual, please contact [email protected].

What is revenue management and why is it needed in the passenger transportation industry of today and tomorrow? Revenue management first appeared in the carrier industry starting in the early 1980s. It arose from the need for accurate demand estimates and resource allocations in the newly deregulated environment. Therefore we begin this book and this module with a look back at the main causes and consequences of carrier deregulation in North America. The second section is an introduction to the basics of revenue management and will serve as a foundation for the rest of the modules in this course. In the final section we look to the future and consider how the internet is changing ticket distribution and some of the challenges and opportunities that it has created.

The primary objective of revenue management (RM) organisations is to maximise the profitability of the company by applying knowledge about the market and the competition, using RM systems and tools. Building a successful RM carrier organisation requires three key elements. First, the passenger carrier must select the appropriate RM systems and tools. Second, they must put the right people in the right places. Third, they must design and implement effective business processes. Success requires paying careful attention to both people and processes. In this module, we begin by considering the people involved in the RM organisation, their job descriptions, skill sets, and the importance of good people management, training and team building. The second section focuses on developing robust and effective business processes and outlines the key steps that you need to follow in doing so. Section three introduces three different organisational structures that can be used within an RM organisation and considers some of the advantages and disadvantages associated with each approach. It also discusses how and why you might choose to change the organisational structure over time.

With variable pricing, a single seat in a compartment can be sold to different customers at different prices. As we’ve seen, a particular set of rules and restrictions are associated with each fare product to ensure that it can only be purchased by the market segment that it targets. How many seats should a passenger carrier make available to each different fare product? How do you manage these seat allocations over the booking cycle in response to actual demand? How do you ensure that you reserve enough seats for the last-minute high-revenue customer? Most of the questions above will be addressed in the next module on seat inventory control that immediately follows this one. Booking classes are an integral part of seat inventory control. Before we can discuss the logistics of inventory control we need to understand booking class assignment and structure. We begin in the first section by describing the use of booking classes in a passenger carrier’s computer reservation system and their evolution over time. Section 2 looks at the process of assigning different fare products to each booking class and identifies potential problems. In the final section, we consider different booking class structures and explain the difference between independent versus nested control structures.

Passenger carrier seats are a perishable inventory. Once a departure leaves, any opportunity to gain revenue from the empty seats are lost. As we have seen in the previous modules, maximum revenue gains can be captured from a departure if all seats are sold and all demand for full-fare seats is met. Booking class assignment based on economic value and optimal seat allocation can lead to large revenue gains. However, carrier seats can also be “spoiled” or depart empty due to passengers who do not show up to board the departure. Carriers need to take steps to avoid or minimise spoilage in order to maximise revenues. In this module, we begin by defining spoilage, explaining why carriers need to overbook, and discussing some implications of this practice. The second section looks at how carriers actually determine optimal overbooking levels to compensate for passenger “no-shows”. The final section introduces some other overbooking measures and considerations including planning for pre-departure cancellations and multi-compartment upgrading.

Pricing is about deciding your market position whereas revenue management is the strategic and tactical decisions firms take in order to optimize revenues and profits. This book offers insights into research, theories, applications and innovations and how to makes these work in different industries.

Multiple booking classes available on a given departure within a single compartment of the equipment all share a common inventory of seats. It is the goal of revenue management to increase or maximise the total revenues of the departure by filling those seats with the most profitable mix of customers. This is accomplished by determining the optimal seat allocations or authorised selling levels, per booking class. We begin this module by considering the benefits and dangers of discount seat allocation control and then look at the respective roles of the revenue analyst and computerised revenue management (RM) systems in determining optimal seat allocations. The second section explains the basic methodology used by many leg- or segment-based RM systems to determine seat protection levels. The final section considers the advantages and disadvantages of leg-based seat inventory control.

The primary fare management objective of passenger carriers is to match a competitor’s fare. This is based on the premise that in a capital- and asset-intensive industry, the marginal cost of adding passengers is very low and hence the focus is to protect and retain market share and pay down fixed costs. Consequently, a carrier’s fare actions are mostly reactive. Fare changes could be classified into two groups, regional or system-wide fare changes and market-specific changes. The former consists mainly of sales and general increases on all fares. Sales are always matched except when an existing sale provides a better incentive to the public than the new one. Market-specific fare changes are typically triggered by a single carrier based on the carrier’s perceived dominance in a market or based on schedule-related service changes in the market. When a fare action is triggered by a carrier, other carriers typically respond with an identical response to protect market share regardless of the revenue impacts. Sometimes, the reaction ripples through other markets or differs from the original change, inducing a series of cascading changes. This behaviour of reactive fare response is consistent with the desire of most passenger transportation executives to retain and protect market share. Research dating back to the nineteenth century confirms that price matching in the competitive marketplace can be an optimal strategy. In this module, we begin by looking at latency in the price planning and execution process. We describe fare dimensions, fare types, and the classification of fare products along with usage rules and purchase restrictions. The second part introduces the fare management process. The next section is on how fare management impacts revenue management.

Pricing, inventory control, and scheduling are three departments that form a revenue management triangle. Scheduling is another means of matching consumer demand with supply. A carrier’s departure schedule defines its core product and is a key determinant of its profitability. The first section in this module looks at the scheduling process as a whole. It considers its importance, the complexity involved and provides an overview of what occurs in the long-, medium- and short-term at different levels in the organisation. In the second section, we focus on the medium-term planning phase and consider the goals and challenges of schedule design and fleet assignment. This third section looks at the short-term management of the current schedule. This includes any ad hoc departure cancellations or other capacity adjustments that are needed closer to departure.