How Airline Revenue Management Can Make a Comeback
In recent years, airline RM has become far less effective and strategic but with increased customer engagement, merchandising and personalisation change is afoot, writes Tom Bacon
When airline revenue management (RM) was in its infancy, decades ago now, it was highly strategic. It neatly ticked all the boxes that McKinsey & Company defines as the characteristics of an effective strategy. According to the global consultancy firm, strategy should be analysed through four lenses – financial performance, markets, competitive advantage, and operating model. By doing so, companies are better placed to make unbiased decisions, improve strategic dialogue and make big, bold changes.
Historically, airline RM was on the right track and worked something like this.
- Financial – New sophisticated analytics applied to airline pricing drove large, measurable revenue increases
- Market – By offering low fares – even on a subset of seats –airlines were able to stimulate demand, and drive higher load factors
- Competitive Advantage – The resulting mix of fares meant the airlines could both compete aggressively against lower cost new entrants and retain their higher fare business passengers
- Operational – The airlines set up new RM departments with new recruiting, training, and dedicated market management
But RM has now become much less strategic. It is viewed more like crew scheduling and line maintenance – a basic part of running an airline. In fact, arguably, looking through each of McKinsey’s four lenses it now scores poorly, although there is potential for change.
Let’s take a closer look.
Although airlines may attribute two to five percent of their revenue to RM, they don’t actually measure this gain. Even more rarely do they know how much their unique (that is, strategic) version of RM adds to their profitability. They rarely know where their current process adds value and where the systems didn’t work. Just as RM systems are now commonplace – all airlines have some form of RM – the benefit has become more ‘a given’ and less measurable with the function effectively less accountable.