Complicated revenue management drives unsatisfactory results, but it doesn’t have to be that way.
Let me start this story with a quote from Scott Kirby, President, United Airlines at the time of the airline’s Third Quarter Earnings Call, October 2016.
“In July as United was seeing stronger demand and bookings were coming in strong at the domestic entity, [revenue management] tried to boost the demand [forecast]… And so, we took a set of markets and didn’t do anything, and we took another set of markets and increased local demand by a 100% in the forecast, another set of markets and increased both the local and the flow demand by 20%. Those were massive, massive changes in demand, and you would expect that to lead to massive changes in output. And at the end of the experiment, those three sets of entities, those three different experimental groups were 0.2% different in outcomes. What that tells you is – and what that really is, we have a big complicated system.”
Having a big complicated [RM] system is true for most airlines. Indeed revenue management (RM) systems are often difficult for the analysts to understand and properly maintain.
But Kirby’s example is totally unintuitive – changing forecast demand should drive different inventory allocations and thus different revenue results.
More specifically: higher local demand would mean the system would set aside fewer seats for lower-yield flow passengers; higher local and flow demand would drive the system to allocate fewer seats for low fare passengers in either category.
If demand really were higher than history would suggest, the third scenario should result in the highest revenue, making sure there were sufficient seats for higher fare demand.
If underlying demand hadn’t changed as much, on the other hand, saving seats for higher fare passengers would result in more empty seats, meaning that the base case should produce the most revenue.
For all three strategies to produce roughly the same revenue means the system is operating in a way that is hard to understand.