Too much intervention can be problematic but a balanced and active approach to airline revenue management works best.
‘Passive’ revenue management (PRM) takes human intervention out of the equation. It means complete reliance on the sophisticated analytical model for setting fares – letting the sophisticated forecast and optimisation model allocate inventory across fare levels, and price dynamically based on a vast database of historic performance.
‘Passive’ means no analyst intervention, nobody trying to ‘outthink’ or override the sophisticated model. One old study showed that analyst intervention was often counter-productive, reducing revenue relative to PRM. Potentially, ‘passive’ management produces better results than constant intervention by even highly trained business analysts. It is also true to say that effective analyst intervention certainly requires understanding the nuances of the model, as well as correctly interpreting information outside the model.
A simple way to measure the success of any revenue management strategy is a calculation of ‘spill’ and ‘spoilage’:
- Spill is the opportunity cost of accepting a lower fare when the seat could be sold to a higher fare passenger who books later.
- Spoilage is an empty seat that occurs because the airline foregoes a low fare booking in anticipation of a higher fare passenger that doesn’t materialise.
So, what are the implications of an industry that embraces ‘passive’ RM?
Slow adjustment to market changes.
A passive management philosophy will be subject to relatively slow adjustment to large market changes. When a significant increase or decrease in demand occurs, the model will be reluctant to immediately adjust the forecast going forward. It will tend to require a more consistent trend before fully adjusting the forecast.
The point to note here is that if the whole industry is slow to adjust to market changes, the entire industry will see spill or spoilage associated with suboptimal performance. If actual demand is weaker than the forecast, then the model will set aside seats for demand that doesn’t materialise, driving spoilage. Similarly, a sudden increase in demand, not immediately incorporated in the model, will drive spill.
