Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS...

Integration of Pricing and Revenue Management for a Future without Booking Classes

AGIFORSReservation and Yield Management Study GroupAnnual Meeting, Bangkok, May 8 - 11, 2001

Natascha Jung Senior Operations Research Specialist

Klaus Weber Senior Scientific Analyst

AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001

Chart 2

Presentationon behalf of my colleague Natascha

Natascha

...and herboss


Chart 3

Agenda

Pricing & Revenue Management

Integrated Approach to Pricing & Revenue Management

Booking Classes

Outlook / Conclusions

Motivation


Chart 4

travel agent

customer

MotivationThe Customer

Typical Travel Agency Situation?

I would like to booka flight fromBangkok to

Rio de Janeiro.

No, ...Yes, I would prefer a

three leg itineraryvia Frankfurt and

Madrid.

Do you have anyidea when and how

you would like tofly?

I see, ...Are you looking fora last minute offer?

That’snot important!

I just like to travelin M class ...

I mean, from BKK toFRA in M, and then

H class to MAD.But for transatlantic

flights I preferclass Q!!


Chart 5

travel agent

customer

MotivationThe Customer (cont.)

I would like to booka flight fromBangkok to

Rio de Janeiro.

Do you have anyidea when and how

you would like tofly?

I understand.You need a

comfortable seatwith power supply

for your laptop.

If you don’t mindthe risk of

thrombosis I can offer you

a discounted farein Eco?

Typical Travel Agency Situation?

I am going to takepart in the annualmeeting of Nobellaureates which

starts next monthand will take 8 days.

Oh, no!I just like to sit andthink about a new

formula.

Great!I take it!


Chart 6

MotivationThe Customer (cont.)

Customer does not care about booking classes! Customer demand depends on

Travel day Prices (offered at ticketing day) Service Restrictions (minimum stay, day application, ...)

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 !!!

Resume

fares


Chart 7

Agenda



Booking Classes


Motivation


Chart 8

Booking ClassesHistorical Review

1955 Central Reservation

1965 Overbooking

1972 Currency Control

1977 Segment Pricing

1989 Fare Mix / Control

1994 Network Management / Bid Pricing

Historical Development of Revenue Management at Lufthansa

1972 Littlewood’s rule

1989 EMSRb

Booking classes


Chart 9

Booking ClassesWhy Booking Classes?

Revenue management point of view

Booking classes reflect ‘somehow’ the customers’will to pay

booking classes are the basis for demand forecast

We do not truly need booking classes but we are used to use them.

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)


Chart 10

Booking ClassesWhy 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

Origin Destination Carrier Booking Cl. Fare Basis Amount CurrencyTicketing from

Ticketing to

Travel from

Travel to

Minimum Stay

Maximum Stay

Advance Purchase

Day Application

BER BKK XY C CRT 5990 DEM 01JAN01 open 01JAN01 open - - - -BER BKK XX C CRT 5650 DEM 01JAN01 open 01JAN01 open - - - -BER BKK XY U ULXAP7DE 1550 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 1234BER BKK XX V VLXAP7DE 1500 DEM 20MAR01 25JUN00 10APR01 15JUN01 SU 30 7 1234BER BKK XY U ULWAP7DE 1750 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 567BER BKK XX V VLWAP7DE 1650 DEM 20MAR01 25JUN00 10APR01 15JUN01 SU 30 7 567


Chart 11

Booking ClassesProblems with Booking Classes

Booking classes are inaccurate, e.g.

Origin Destination Carrier Booking Cl. Fare Basis Amount CurrencyTicketing from

Ticketing to

Travel from

Travel to

Minimum Stay

Maximum Stay

Advance Purchase

Day Application

BER BKK XY U ULXAP7DE 1550 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 1234BER BKK XY U UDUMMY 4990 DEM 01JAN01 open 01JAN01 open - - - -BER BKK XX V VLXAP7DE 1550 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 1234BER BKK XX V VDUMMY 4750 DEM 01JAN01 open 01JAN01 open - - - -

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


Chart 12

Booking ClassesProblems with Booking Classes (cont.)

RM systems forecast on historical data

Different demand

Different average values of corresponding booking classes

!!! Meanwhile fares might have been changed !!!


Chart 13

Booking ClassesBooking Classes - pros and cons

Booking classespros

Booking classescons

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 protectsnot necessary

Booking classes only indirectly used for BP calculation Booking class corresponds

to class value (‘somehow’)

Inexactness of booking classes restricts opportunity of

additional revenue gain... in 0.1 % range (which are millions of € or $)

Booking class can be identified with restrictions (‘somehow’)

‘approximation’ inexact, but works


Chart 14

Booking classescons

Booking classespros

Booking ClassesBooking Classes - pros and cons (cont.)

‘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’


Chart 15

Agenda



Booking Classes


Motivation


Chart 16

Pricing & Revenue ManagementOverview: Pricing System - Price Elasticity Model

CompetitorReactionAnalyser

Market ShareModel

Market Stimulation

Model

Price Elasticity ModelTrigger

Fare Change

Output

Demand Shift

Traveller Preference Analyser

FareAnalyser


Chart 17

Pricing & Revenue ManagementOverview: Revenue Management System

O&D Forecast Engine

O&D Optimiser

ForecastInterface DB

OptimiserInterface DBIn

vent

ory

GDS

GDS

GDS

GDS

...

Forecast Building

Demand Forecasts

ControlParameters


Chart 18

Pricing & Revenue ManagementComparison

Pricing Revenue Management

Market - ODorigin destinationFares given on this level.

ODIF POSorigin destination itinerary fare class point of saleBooking values given on this level.

customer oriented

Market size Market share Fares

Target level(What shall be controlled?)

Value / revenue oriented coarse level fine level

Target quantities(Which quantities are focused on?)

ODIF POS demand ODIF POS values marginal seats revenues bid prices


Chart 19

Pricing & Revenue ManagementComparison (cont.)


Market ShareModel

MarketStimulation

Model

Price Elasticity ModelTrigger

Price Change

Output

Demand Shift

TravellerPreferenceAnalyser

FareAnalyser

O&D Forecast Engine

O&D Optimiser


OptimiserInterface DB

Inve

nto

ry

GDS

GDS

GDS

GDS

...

Forecast Building

Demand Forecasts

ControlParameters

Market size Market share Fares

Target quantities(Which quantities are focused on?)

ODIF POS demand ODIF POS values marginal seats revenues bid prices

Pricing Revenue Management

Linking both spheres means

replace booking classes in RM sphere by fares (properly) integrate both spheres


Chart 20

”COPY PNR_ - RT IN AMADEUS FOR MODIFICATION. 1.WEBER/KLAUSMR(001) 2.JUNG/NATASCHAMRS(001)017 X3.SSR OTHS LH PLS DAPO TO CNFM LH 729 24 OR 25 APR (017)... LH 721 H 24APR01PEKFRA XL2 1025 1425 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010) LH3002 H 24APR01FRAHEL XL2 1720 2050 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010)011 05APR01 0906 998 MUCRM1A /05090651/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH...015 10APR01 0215 998 MUCRM1A /10021609/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH LH 729 H 10APR01PVGFRA XX2 1110 1625 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015) LH3002 H 10APR01FRAHEL XX2 1720 2050 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015)

Pricing & Revenue ManagementRequirements for Integration

Current Demand Forecast

Booking histories Current booking level

Booking classes Booking classes

PN

R

PN

R


Chart 21

Pricing & Revenue ManagementRequirements for Integration

Fare buckets= fares clustered with respect to

value / revenue restrictions

Fare buckets??? Source ???

Why buckets?

Optimisation requires competition among customers for same seat

Why not take fares, i.e. one fare per bucket?

Too many buckets

Integrated Demand Forecast


fare

In the future?... together withother usefull,quantities,e.g. bid prices

PricingDB

restrictions etc.

fare

(ine

xact

)

class info

Booking histories Current booking level


Chart 22

Pricing & Revenue ManagementRequirements for Integration (cont.)

Bookings

bkgno.

fare amount

1 CRT 5990

2 CRT 5990

3 VLXAP7DE 1500

4 CRT 5990

5 VLWAP7DE 1650

6 VLWAP7DE 1650

... ... ...

Fare buckets

value /revenue2515

2515

670

2515

705

705

...

...

av. valueno. of bkgs.



Example

Value900 - 1100

restrictionsunday return

advanced purchase14 days

For optimisation we need to forecast the number of bookings in each fare bucket.


Chart 23

Agenda



Booking Classes


Motivation


Chart 24


Market ShareModel

Market Stimulation

Model

Price Elasticity Model

Traveller Preference Analyser

AlternativeAnalyser

Datasources

Integrated Approach Pricing & RMPrice Elasticity Model

MIDT

ATPCO

Internalfare data

1

2

n

Utilityfactors

Customer choice modelmultinomial logit model

customer’s choice depends on

amount minimum stay advanced

purchase ...

Forecast of demand for each fare bucket - step 1

Separate for business and leisure passengers


Chart 25

Demand forecast

Forecast basis

Market SizeForecaster

Integrated Approach Pricing & RMMarket Size Forecaster

Datasources

MIDT

ATPCO

Internalfare data

bkgno.

fare

1 CRT

2 CRT

3 VLXAP7DE

4 CRT

5 VLWAP7DE

6 VLWAP7DE

... ...

Forecast of demand for each fare bucket - step 2

Currentbookings


Chart 26

Integrated Approach Pricing & RMFare Buckets Forecast

Price ElasticityModel

( )1 2 n K

fare marketshare

fare1 1

fare2 2

fare3 3

fare4 4

fare5 5

... ...

faren n

Forecast of demand for each fare basket - step 3

Market SizeForecaster

itinerary forecastvalue

forecasterror

ODI1 fc_val1 fc_err1ODI2 fc_val2 fc_err2ODI3 fc_val3 fc_err3ODI4 fc_val4 fc_err4ODI5 fc_val5 fc_err5... ... ...

ODIn fc_valn fc_errn

Per ticketing/travel combination

Per departuredate

...




Fare buckets


Chart 27

Integrated Approach Pricing & RMSystem Overview

O&D Optimiser


OptimiserInterface DB

Inve

ntor

y

GDS

GDS

GDS

GDS

...

Market Shares

Demand Forecasts

ControlParameters

Market Size Forecast


Market Size

Bookingswith Fare

Information


Chart 28

Integrated Approach Pricing & RMDemand Changes

Fare

ChangeFloating dcp Snap shot


DemandShift

DemandShift

Current Demand

Previous Forecast

Learning

Re-Optimisation

Previous New

Forecast


Chart 29

Agenda



Booking Classes


Motivation


Chart 30


Outlook / ConclusionsOutlook - Mining PNRs

Business passengers behave different from leisure passengers

Separate customer choice models

Problem: Identification of passenger types

history data

current booking data

Fare information available (insufficient?)

PNR may not contain fare information!

Mine PNR data to decide to which type passenger belongs to

PNR

e.g. pax travels single

... or with family pax is frequent

traveller ...

!!


Chart 31

Outlook / ConclusionsSummary

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


Chart 32

Outlook / ConclusionsSummary 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 schedulingNetLine/Plan

Interested airlines are kindly invited for

proving the concept

Thank you for your attention!Any questions?

Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS...

Documents

Transcript of Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS...