Revenue ManagementRevenue Management

CRM RM2003 Workshop

Centre de recherches mathematiques

University of Montreal

May 16, 2003

Challenges Faced In the Challenges Faced In the Rental Car IndustryRental Car Industry

Purpose

• Introduce the Rental Car Revenue Management Practice• Illustrate some “interesting” problems• Stimulate interest and facilitate desires to work on

challenging real life and timely problems• Win – win applied science

StudentsReal life problems (relevance) and data (feasibility)

VendorsCommunication, focus, and business strategies

IndustryLow cost research, development, and diverse thought

Agenda

Introduction• Brief Background on DTAG• Our “Revenue Management System”• Car Rental Market Specifics

Challenges & 7 Key Areas of Interest

Q & A

Dollar Thrifty Automotive Group

Just recently made the Fortune ™ 1,000 List (# 999)• Over $1 billion in Annual Revenue • Continued growth over past 5 years (Including 2001 & 2002)• Low cost provider – mostly leisure orientated consumers• The most profitable Car Rental company

Dollar is mostly corporately owned and “on airport”Thrifty is * mostly franchisees

• Worlds largest Car Rental Franchise

Internal merger - January 2003• * New growth initiatives through Corporate acquisitions of target

licensees• Resultant is now “Dual Branding”

The Complete Revenue Management System “RMS”

Science

ProcessingPerformanceMeasurement

HumanResource

AutomationDecisionSupport

Reports, Graphs, Analysis& Research

ReservationsRates

&Turndowns

Data and Information Flow

RateManagement

Rental TransactionsRentals, Returns, Fleet, Walkups, Offsells

Forecast,Optimization,Competitive

RatePlacement

Rental Car Market Specifics

Supply• Fleet is flexible to a degree depending on time horizon• Fleet is also a significant fixed cost component in the short term• It also moves – (relocates itself)

Demand• Mostly “secondary demand” Inelastic as a market whole• Car Rental is a Commodity to a large extent – (Same cars)

Service is the primary differentiating quality (what % of consumption is it?) Therefore, very Elastic between companies

Market• Fluid pricing capabilities – dynamic pricing is prevalent• Low barriers to entry – no “geographical markets” per say – most companies can be

everywhereEconomies of Scale

• Since the fleet is highly leveraged, companies can run enormous volumes and spread the fixed costs over larger revenue base.

Areas of Interest

1. Segmentation

2. Forecasting and optimization

3. Business strategy, competitive information and analysis

4. Decision support

5. Performance measurement

6. Data

7. People

1. Segmentation Methods

• Market Segment (Business, Leisure, Tour,..)

• Distribution channel

• Length of rent (LOR)

• Brand

• Car class

• Arrival date, day of week, and time of day

• And yes, to some extent – Advanced days

1. Segmentation

Methods to segment

Fencing off segments

Capitalize on different demand levels and elascticities

When to increase / decrease segmentation

The end result is pricing

1. Segmentation Illustration

Consolidators

GDS

Phones

Internal Sites

InternetTravel Agents

Leisure Business

Tour

2. Forecasting and Optimization

Forecasting / Proactive Approach• What to forecast? What level of detail? How to forecast

(Method)? What to do with a forecast? Demand Rate No Show, Cancellations Overbooking Booking (and Demand) Paces and Walkup Upsell and Upgrade Competitive information and gaming

• Seasonality (Calendar, DOW, Business Cycle)• Unconstraining (Inclusion of Turndowns / Conversions)

Optimization• Tradeoffs, Objective, Methods, and Implementation

Forecasting Samples3/20/03 PHXMET

0

500

1000

1500

2000

2500

3000

3500

4000

3/20

/03

3/22

/03

3/24

/03

3/26

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4/1/

034/

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3

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10/0

3

6/12

/03

6/14

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6/16

/03

Date

Dem

and

/ F

leet

Unconstrained Constrained Fleet NOR

Total Revenue

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

Jan-

99

Jun-

99

Nov

-99

Apr

-00

Sep

-00

Feb

-01

Jul-0

1

Dec

-01

May

-02

Oct

-02

Mar

-03

Aug

-03

Jan-

04

Jun-

04

Nov

-04

Month - Year

$ (U

S) Data

Fitted

Forecast

Upper 95%

Low er 5%

PHX - I

3/20/03 PHXMET I Car Class

0

100

200

300

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900

3/20

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3/22

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3/30

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4/1/

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4/3/

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5/27

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6/6/

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6/8/

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6/10

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6/12

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6/14

/03

6/16

/03

Date

Dem

and

/ F

leet

Unconstrained Constrained Fleet NOR

PHX - M

3/20/03 PHXMET M Car Class

0

50

100

150

200

250

300

350

400

450

500

3/20

/03

3/22

/03

3/24

/03

3/26

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3/28

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3/30

/03

4/1/

03

4/3/

034/

5/03

4/7/

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4/9/

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34/

13/0

3

4/15

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10/0

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6/16

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Date

Dem

and

/ F

leet

Unconstrained Constrained Fleet NOR

PHX - 4

3/20/03 PHXMET 4 Car Class

0

50

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3/20

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11/0

35/

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35/

15/0

3

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6/12

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6/16

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Date

Dem

and

/ F

leet

Unconstrained Constrained Fleet NOR

PHX - L

3/20/03 PHXMET L Car Class

0

50

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300

3/20

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Date

Dem

and

/ F

leet

Unconstrained Constrained Fleet NOR

2. Optimization – Sample Output

Current Recs PHX RTD RCUD1 ICAR Post Date: 3/18/03

-20%

-10%

0%

10%

20%

30%

40%

3/19

3/21

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6/11

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6/15

Arrival DATE

Rec

SP

RE

AD

PHX I – LOR 3-4 RECS

Current Recs PHX RTD RCUD3 ICAR Post Date: 3/18/03

-20%

-10%

0%

10%

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30%

40%

3/19

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6/7

6/9

6/11

6/13

Arrival DATE

Rec

SP

RE

AD

PHX L – LOR 1-2 RECS

Current Recs PHX RTD RCUD1 LCAR Post Date: 3/18/03

-20%

-10%

0%

10%

20%

30%

40%

3/19

3/21

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Arrival DATE

Rec

SP

RE

AD

Implementation

Information

Processing

Data

Conclusions / NewData Needs

Post EventAnalysis

3. Competitive Information

1. Decision Support

2. Formal Integration

3. Increasing the understanding

3. Competition - SampleInternet Rates : LOC: IAD / SITE: Orbitz / CAR TYPE: E / LOR: 7

100

110

120

130

140

150

160

170

180

4/9/

03

4/11

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4/13

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4/29

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5/1/

03

5/3/

03

5/5/

03

5/7/

03

5/9/

03

ARRIVAL DATE

RA

TE

HERTZ THRIFTY ALAMO ENTERPRISE BUDGETAVIS NATIONAL DOLLAR

One Method for Implementation - Strategy ScreensCurrent Recs PHX RTD RCUD1 ICAR Post Date: 3/18/03

-20%

-10%

0%

10%

20%

30%

40%

3/19

3/21

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3/31 4/2

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6/15

Arrival DATE

Rec

SP

RE

AD

$1 < Lowest PricedCompetitor (#1)

Match

$1 <

Match

$1 <

Match

# 1

# 2

# 3

# 3

# 2

4. Decision SupportTypes

• Reports• Analysis

Formal Ad Hoc

Formats• Production systems • Independent “consolidating” DSS • Prototypes and/or informal tools

Support• Technical• Intellectual – Use/Misuse, education and training tools

Purpose• Transcend intuition• Bridge the theory and application• To be the catalyst of better decisions• Gain insight and understanding – Build knowledge

DSS Samples - Interfaces

DSS Samples - Report

Type Advance LOR LOR LOR LOR LOR LOR LOR LOR LOR LORDays Less than 1 1 to 2 3 to 4 5 to 6 7 to 8 9 to 10 11 to 14 15 to 21 22 to 28 29 +

Booked T & M less than 24 hours $38.49 $45.25 $37.98 $37.54 $24.74 $22.36 $35.09 $26.56 $30.13 $0.001 to 2 $39.59 $40.36 $34.10 $35.44 $27.47 $34.54 $26.31 $25.57 $28.50 $0.003 to 4 $22.58 $33.24 $33.74 $36.52 $30.76 $30.52 $26.02 $0.00 $0.00 $0.005 to 7 $35.14 $33.12 $33.48 $39.89 $36.15 $29.38 $28.12 $0.00 $0.00 $0.008 to 10 $33.04 $34.28 $35.06 $36.99 $34.62 $42.32 $30.96 $18.37 $0.00 $0.0011 to 14 $29.57 $35.21 $35.01 $35.04 $40.80 $37.01 $27.47 $0.00 $0.00 $0.0015 to 21 $40.06 $35.90 $35.83 $33.46 $29.99 $34.11 $26.38 $27.39 $0.00 $0.0022 to 28 $0.00 $37.03 $37.24 $35.39 $26.80 $42.86 $29.54 $26.85 $0.00 $0.0029 to 44 $44.88 $37.25 $40.00 $36.79 $30.97 $28.83 $31.61 $0.00 $0.00 $0.0045 days out plus $0.00 $37.06 $55.44 $49.15 $43.97 $44.55 $36.52 $0.00 $0.00 $0.00

Booked Days less than 24 hours 2 88 63 19 16 3 2 3 1 01 to 2 19 168 180 73 40 13 5 2 2 03 to 4 3 74 98 39 38 4 6 0 0 05 to 7 9 90 132 59 33 5 5 0 0 08 to 10 6 58 89 39 19 8 4 1 0 011 to 14 4 69 97 41 36 5 3 0 0 015 to 21 2 60 144 80 49 9 8 3 0 022 to 28 0 23 87 66 38 4 4 2 0 029 to 44 2 17 61 39 44 8 5 0 0 045 days out plus 0 4 57 86 108 12 10 1 1 0

No Show less than 24 hours 0.00% 41.33% 35.71% 26.92% 44.83% 25.00% 50.00% 40.00% 0.00% 0.00%1 to 2 34.48% 33.86% 30.77% 27.72% 43.66% 23.53% 44.44% 66.67% 33.33% 0.00%3 to 4 40.00% 23.71% 24.03% 38.10% 34.48% 55.56% 33.33% 100.00% 0.00% 0.00%5 to 7 25.00% 27.42% 21.89% 29.76% 35.29% 58.33% 28.57% 0.00% 0.00% 0.00%8 to 10 14.29% 19.44% 23.28% 22.00% 38.71% 0.00% 20.00% 0.00% 0.00% 0.00%11 to 14 33.33% 22.47% 24.22% 30.51% 28.00% 28.57% 40.00% 100.00% 0.00% 0.00%15 to 21 60.00% 22.08% 22.16% 34.43% 31.94% 35.71% 38.46% 40.00% 0.00% 0.00%22 to 28 100.00% 23.33% 21.62% 25.00% 25.49% 42.86% 20.00% 33.33% 0.00% 0.00%29 to 44 0.00% 50.00% 29.07% 32.76% 26.67% 20.00% 37.50% 0.00% 0.00% 0.00%45 days out plus 0.00% 42.86% 25.00% 15.69% 27.03% 40.00% 16.67% 66.67% 0.00% 0.00%

Reservations by Advance Days & Length of Rent ReportLocation DEN for all Car Classes From 03/15/2003 To 03/30/2003

For all Business Segments As Of 04/30/2003 11:15

DSS - Samples

PHX I – LOR 1-2 RECS

Current Recs PHX RTD RCUD1 ICAR Post Date: 3/18/03

-20%

-10%

0%

10%

20%

30%

40%

3/19

3/21

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6/15

Arrival DATE

Rec

SP

RE

AD

PHX I – LOR 3-4 RECS

Current Recs PHX RTD RCUD3 ICAR Post Date: 3/18/03

-20%

-10%

0%

10%

20%

30%

40%

3/19

3/21

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6/13

Arrival DATE

Rec

SP

RE

AD

PHX L – LOR 1-2 RECS

Current Recs PHX RTD RCUD1 LCAR Post Date: 3/18/03

-20%

-10%

0%

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20%

30%

40%

3/19

3/21

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Arrival DATE

Rec

SP

RE

AD

5. Performance MeasurementChallenges

• Lack of a control• Seasonality• Numerous simultaneous variables• Interpretation / subjectivity• Need for aggregation• Internal agenda and bias

Current standard is still year over year and aggregate benchmarks like yield, utilization, and revenue per unit

Performance of what?• System? Implementation? Location? Company?, People?,

Industry?

Performance Measurement Advancements

• Awareness, education, understanding and appreciation

• Opportunity cost models

• Solid economic theory and foundation, then back with quantification efforts

• Turndown and conversion data availability at new levels of “richness”

6. Data

Timeliness matters for production, but perhaps not for research

Not perfect Messy and erroneous, but consistentDetailed transaction levelNeed to aggregate and join Lots of it – diverse, but little history Sample sets are currently available and other are

feasible

7. People

People are not only the glue to make it all work, but they are also the catalyst for new ideas

Process, Integrate, Implement, Create, Innovate, Develop, Communicate and Understand!

Sample Questions or Research Topics

• How correlated is the initial build to final demand?• Ability to segment balanced with the ability to manage• Margin based segmentation (Rev-Cost) with an ability to

capitalize on inelastic demand• Understanding the consumer and gaming the competitors• Opportunity cost Consumer surplus from the industry,

company, or finest detail of business • Price elasticity, elasticity, elasticity From specific

channel pricing to fleet acquisition

Summary / Q & A