Ch 6 Revenue Management

6-1 Ch 6 Revenue Management 6.1 History 6.2 Levels of Revenue Management 6.3 Revenue Management Strategy 6.4 The System Context 6.5 Booking Control 6.6 Tactical Revenue Management 6.7 Net Contribution in Revenue Management 6.8 Measuring Revenue Management Effectiveness 6.9 Revenue Management in Action

6-2 Introduction of Revenue Management Manage the allocation of capacity to different fare classes over time to maximize revenue Applicable under the following conditions 1. The seller is selling a fixed ( 固 定 的 ) stock of perishable capacity 2. Customers book ( 預 訂 ) capacity prior to departure ( 出 發 之 前 ) 3. The seller manages a set of fare classes ( 等 級 ), each of which has a fixed price (at least in the short run).

6-3 6.1 History ( 歷 史 ) In 1978, US Congress passed the Airline Deregulation ( 撤 銷 管 制 ) Act No restrictions on schedules and fares To inspire and encourage ( 鼓 勵 ) creative new entrants PeopleExpress: Bare-bone ( 空 架 子 ) service for pricesensitive customers and lower cost structure than American Airlines (AA) AA s Ultimate Super Saver Fares program Book at least 2 weeks before departure and stay at his destination ( 終 點 ) over a Saturday night Restrict ( 限 制 ) the number of discount seats PeopleExpress went bankruptcy ( 破 產 ) in 1985

6-4 6.2 Levels of Revenue Management Level Description Frequency Strategic ( 戰 略 的 ) Segment market and differentiate prices Quarterly ( 季 ) or annually Tactical ( 戰 術 的 ) Calculate and update booking limits Daily or weekly Booking control Determine which bookings to accept and which to reject ( 拒 絕 ) Real time For airlines, hotels, rental car companies, and cruise lines ( 郵 輪 ), booking control is a function of the reservation ( 訂 位 ) system. Tactical RM is the brains of the process. Ch 7-9: Forecast future demand, run optimization algorithms, set and update booking limits

6-5 6.3 Revenue Management Strategy (1/2) Characteristics of business vs. leisure ( 悠 閒 ) customers at the passenger airlines Product versioning: Use artificial restrictions ( 人 為 的 限 制 ) to create an inferior ( 較 差 的 ) product Leisure Highly price sensitive Book earlier More flexible ( 有 彈 性 的 ) to departure and arrival times More accepting of restrictions such as Saturday night stayovers ( 停 留 ) Business Less price sensitive Book later Less flexible Less accepting of restrictions

6-6 6.3 Revenue Management Strategy (2/2) Other tactics (in section 4.3) by the airlines: Group pricing for government, senior citizens, Regional pricing: Different prices in different countries ( 長 榮 : 台 灣 買 來 回 票 > 美 國 買 來 回 票 ) Channel pricing: Cheaper through the Internet Cruise lines Bulk ( 大 批 ) purchases booked earlier and sold at lower fares than individual ( 個 別 的 ) cruise Charge different rates for customers from different cities

6-7 6.4 The System Context (1/2) SABRE (from 1964): Computerized reservation ( 預 訂 ) system (CRS) for American Airlines Software for mainframes Reservation system developed first, then RM added Distribution channels ( 配 銷 通 路 ): Global distribution system (GDS) Important players among 180,000 GDS terminals worldwide: AMADEUS, Galileo, SABRE, Worldspan (1, 2, 3)

6.4 The System Context (2/2) 6-8

6-9 6.5 Booking Control Determine whether or not each booking request ( 訂 位 請 求 ) received should be accepted ( 接 受 ) or rejected ( 拒 絕 ) in real time (< 200 milliseconds ( 毫 秒 ) = 200/1000 秒 ) Example 6.1: An airline receives a B-Class request for 3 seats on Flight 137 from Houston to Miami, departing ( 出 發 ) in two weeks. The current B-Class booking limit for this flight is 2. Because there is insufficient ( 不 足 的 ) availability, the request is rejected ( 拒 絕 ).

6-10 Booking Control: Allotments ( 分 配 ) Divide the available capacity into discrete chunks ( 相 當 大 的 數 量 ) and allocate each chunk to a fare class Example 6.2: A 100-seat aircraft is being managed using allotments. Deep-discount bookings (B-Class): $125 fare, 30 seats Full-fare coach (M-Class): $200 fare, 45 seats Business class (Y-Class): $560 fare, 25 seats Two weeks before departure, 25 B-Class, 45 M-Class, and 10 Y-Class bookings have been accepted. The remaining ( 剩 下 的 ) allotments are 5 seats for B-Class, no seats for M-Class, and 15 seats for Y-Class. Drawback ( 缺 點 ): Once the M-class allotment closed Accept $125 customers while rejecting $200 bookings

6-11 Booking Control: Nesting ( 嵌 套 法 ) (Figure 6.2, next slide) (1/2) 1: The highest ( 最 高 的 ) fare class, n: the lowest b i : Booking limit for class i, Upper bound ( 上 限 ) on the total number of bookings that will be accepted b 1 b 2 b 3 b n y j : Protection ( 保 留 ) levels for class j = 1, 2,, n 1 Total number of seats available to class j and all higher classes Relationship ( 關 係 ): y j = b 1 b j+1 for j = 1, 2,, n 1 and y n = b 1 0 y 1 y 2 y n-1

6-12 Booking Control: Nesting (2/2) b 1 = y n

Dynamic ( 動 態 的 ) Nested Booking Control 6-13 時 間 Booking Limits (b) Protection levels (y) y n = b 1 y j = b 1 b j+1 1 2 3 4 5 1 2 3 4 5 Request Action 1 100 73 12 4 0 27 88 96 100 100 2 seats in Class 5 2 100 73 12 4 0 27 88 96 100 100 5 seats in Class 2 3 100 5 =95 68 7 (4 5) 0 0 27 88 95 95 95 1 seat in Class 2 4 94 67 6 0 0 27 88 94 94 94 1 seat in Class 4 5 94 67 6 0 0 27 88 94 94 94 1 seat in Class 2 Reject (0<2) Accept Accept Reject Accept

6-14 6.6 Tactical ( 戰 術 的 ) Revenue Management (1/2) Calculate and periodically ( 週 期 性 地 ) update booking limits Transmitted to and used by the reservation system Passenger airlines Hotels Rental car companies Cruise lines Resource Flight leg Property Location Sailing Resource unit Seat Room night Rental day Berth ( 舖 位 ) Resource types Number of types Service classes Room types Car types Berth classes 1 3 1 many 3 10 5 10 Products Itineraries ( 路 線 ) Arrival date / length of stay Products per resource Many for hub-andspoke airline Arrival date / length of rental Cruise Many Many Few

6-15 6.6 Tactical Revenue Management (2/2) A supplier controls (1) a set of resources with fixed and perishable capacity, (2) a portfolio ( 組 合 ) of products consisting of combinations ( 組 合 ) of one or more of the resources, and (3) a set of fare classes associated with ( 把... 和... 聯 繫 在 一 起 ) each of the products. The tactical revenue management problem: Choose which fare classes should be open ( 開 放 ) and which closed ( 關 ) for sale at each moment to maximize ( 最 大 化 ) expected total net contribution.

6-16 Components of Tactical RM 1. (Ch 7) Capacity allocation: How many customers from different fare classes should be allowed to book? 2. (Ch 8) Network management: How should bookings be managed across a network of resources, such as an airline hub-and-spoke system or multiple-night hotel stays? 3. (Ch 9) Overbooking ( 超 賣 ): How many total bookings should be accepted for a product in the face of uncertain future no-shows ( 沒 有 出 現 ) and cancellations ( 取 消 )?

Relative Importance of RM Problems 6-17 Among Industries * = little importance, ** = can be important in some cases, *** = usually important, **** = of great importance, N/A = not applicable ( 適 用 的 ) Industry Capacity allocation Network management Passenger Hub-and-spoke **** *** **** airlines Point-to-point ** N/A **** Hotels Business *** **** *** Resort ** ** * Rental cars *** **** *** Cruise lines **** N/A * Passenger rail ** **** * Air freight *** ** *** Event ticketing (song) **** N/A N/A Overbooking

6-18 RM Systems The forecasts ( 預 測 ) generated by the RM system are probabilistic ( 隨 機 的 ); that is, a mean and a standard deviation ( 標 準 差 ) for future demand

6-19 Updating ( 更 新 ) Booking Limits Reoptimization or an update: Periodically, demand is reforecast and new booking limits are calculated based on the new forecasts of demand and remaining unbooked capacity Updates triggered ( 觸 發 ) in 3 different ways 1. Periodic updates occur at scheduled intervals: Monthly far from departure, daily or more often prior to departure 2. Event-driven updates: A booking class closing, a change in aircraft, unanticipated spike in demand 3. Requested updates: Competitive actions, changes in fares, anticipated changes in future demand

6.7 Net Contribution in Revenue Management Expected net contribution of a customer commitment = Price (fare) ( 減 ) Incremental ( 增 加 的 ) cost Incremental cost elements in some RM industries Industry Incremental cost elements Relative importance Passenger airlines Commissions, incremental fuel, meal ( 餐 ) Moderate costs, passenger fees Hotels Commissions, room cleaning, wear and tear Low Rental cars Commissions, check-in / check-out, wear Moderate and tear Cruise lines Commissions, food, cleaning costs High Container shipping Repositioning, handling, incremental fuel High Sporting events and theater Commissions ( 佣 金 ) 6-20 Very low

6-21 Incremental Cost SABRE charges ( 收 費 ) $3 to $4 per flight segment for an airline booking and about $4 per room for a typical hotel booking Travel agents ( 旅 行 社 職 員 ): Commission of about 10% Variable cost on its Web site: $1.50

6-22 Per-ticket distribution costs by channel for a $325 ticket for Continental Airlines

Activity-based costing ( 作 業 成 本 分 析 法 ) model for a fictional ( 虛 構 的 ) rental car company 6-23 Cost element Units Value Description Commissions ( 佣 金 ) Transaction ( 交 易 ) cost Daily ( 每 日 的 ) cost $/$ 15% Commission paid for bookings through travel agents 0% Commission paid for bookings through 800 number or at one of its airport counters $/Rental $8.25 Paperwork, cleaning costs, check-in ( 到 達 並 登 記 ) and check-out costs for each rental $/Day $4.32 Wear and tear ( 損 耗 ) per day of rental

Ancillary ( 補 助 的 ) Products and Services 6-24 Industry Ancillary products and services Importance Passenger airlines Duty-free ( 免 稅 的 ) sales, Low beverage ( 飲 料 ) sales Hotels Food and beverage, minibar, Medium ( 中 間 ) telephone fees Rental cars Insurance ( 保 險 ), gasoline Medium Cruise lines Gambling ( 賭 博 ), onboard sales Medium to high Freight ( 貨 物 ) transportation Sporting events, theater Sorting, call before delivery, special handling Food and beverage, merchandise ( 貨 物 ) sales Medium High Hotel/casinos Gambling Very high

6-25 Calculating Expected Net Contribution (NC) Net contribution = Price + Ancillary contribution Incremental cost Smith and Jones: Rent a car for two days for the advertised ( 廣 告 ) rate of $28 per day Jones s NC: Cost (by agent): $16.89 + 0.15 (2 $28) = $25.29 NC = 2 $28 $25.29 = $30.71 Smith s NC higher and gets the car Cost (by counter): $8.25 + ($4.32 2) = $16.89 NC = 2 $28 + $7.20 (insurance) $16.89 = $53.51

6-26 6.8 Measuring Revenue Management (1/2) Before deregulation: 150 seat and 105 customers 105 / 150 = 70% load factor (75% to break even ( 收 支 平 衡 )) After deregulation ( 撤 銷 管 制 ) Yield ( 收 益 ): Revenue per passenger mile Leading ( 主 要 的 ) metric currently used: RASM (revenue per available seat mile) = Net yield ( 淨 收 益 ) Load factor 100 seat and 1800-mile flight with revenue $50,000 RASM = 50000/ (100 1800) = $0.28 (1 mile 英 里 = 1609.344 公 尺 ) Other: Revenue per available room night (REVPAR) at hotels,

6-27 6.8 Measuring Revenue Management After deregulation (2/2) RASM = Net yield Load factor A better metric: Net contribution per available seat mile (NCASM) Operating cost ( 作 業 成 本 ) for each customer: $50 (1) 100 passengers paying $500 each NCASM =($50,000 100 $50)/180000 = $0.25 (2) 50 passengers paying $1000 each NCASM =($50,000 50 $50)/180000 = $0.26 If fares >> operating cost RASM NCASM

6.9 Revenue Management in Action Success: (1/3) Every major airline, hotel, rental car company, or cruise line has a RM department or a RM function Spread to railroads ( 鐵 路 ), broadcasting ( 廣 播 ), and freight ( 貨 物 ) transportation Active research Better incorporate ( 加 入 ) customer behavior ( 消 費 者 行 為 ), lifetime ( 終 身 的 ) customer value, and competitive ( 競 爭 的 ) response into RM decisions (chapter 11) Adapt revenue approached to the needs of new industries, ranging from oil and gas pipelines to health care to made-to-order manufacturing 6-28

6-29 6.9 Revenue Management in Action (2/3) In early 2003, United Airlines declared bankruptcy ( 破 產 ), while American Airlines lost more than $3 billion in 2002 and was asking for federal funding to survive. Comparison ( 比 較 ) of the Big 6 (AA, Continental, Delta, Northwest, United Airlines, US Airways) versus low-cost carriers (2002 annual results) CASM: Cost per available seat mile Average Big 6 Southwest JetBlue AirTran Low-cost average RASM 10.5 8.4 7.7 9.1 8.4 CASM 11.1 7.5 6.3 8.5 7.4 Net contribution per seat mile 10.5 11.1 = 0.6 0.9 1.4 0.6 1.0

6.9 Revenue Management in Action (3/3) 6-30 Travel accounted for 36% of retail purchase on the Internet New challenges from the Internet Fare visibility ( 能 見 度 ) to consumers Rise of new online inter mediaries ( 中 間, 媒 介 ), such as Expedia, Travelocity, and Priceline Create and sell more inferior ( 差 的 ) products: Priceline allows customers to bid ( 出 價 ) for travel without knowing the exact departure time or airline Opaque ( 不 透 明 ) products Much more suited ( 適 合 ) to real-time pricing