Can You Dare to Dream of Variable Capacity in RM?
In an environment where the whole basis for RM is optimal allocation of fixed capacity, is there another way?
RM forecasts demand, no-shows and allocates seats. But what if the forecasts are wrong and they discover the error after seats are already sold? Or what if the number of seats available shrinks suddenly due a change in equipment? Alaska Airlines and Volantio calls these scenarios ‘post-sale RM’ or ‘variable capacity’.
Questions that arise include:
- What if there are fewer no-shows than expected?
- What if demand is much more than expected and you are now spilling high fare passengers?
- What if supply changes with an aircraft downgrade or upgrade, suddenly changing the whole demand profile?
Despite the enhancements to the forecasting process introduced over the last decade, demand forecasts by fare range remain highly uncertain – the variance for demand around an average forecast is typically huge. Consequently, it is not uncommon that two to three weeks before departure, the demand forecast has changed dramatically from the forecast more than a month before departure, when there were few sales already on the books. Frequently, in hindsight, an analyst will wish he had ten more seats on the plane given the increased demand on one flight – and ten fewer seats on another flight.
Revenue management is touted for how dynamic it is. Every night it updates forecasts based on the most recent information and re-optimizes inventory across thousands of flights. But it is focused on each flight independently and doesn’t consider such inter-flight opportunities – except in a crisis situation when dealing with oversales at the airport (which is handled by front-line airport employees, not the RM analysts). The result is higher cost of oversales, more customer disruption, and less revenue than if flights are treated more as a system earlier in the booking process.