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Revenue Management: The Runway to Airline Profitability

Throughout succeeding waves of consolidation and intensifying competition in the airline industry, perhaps no single tool has been more essential to companies’ profitability than revenue management. The ability of revenue management systems to measure what’s working and what isn’t—and where the real value is being generated—is more critical than ever.

Carriers need clear methodologies that predict, with statistical significance, the impact of any revenue-management move. These three steps can help build models that cut through the complexity of an airline revenue-management system to expose the impact of changing one or more variables:

  1. Segment routes based on two key dimensions to align their value to consumers with their value to the company. The supply dimension is based on competitiveness, for example, or the number of airlines that are flying a particular route nonstop. Demand is based on the customer’s willingness to pay—the percentage of high-yield business travelers on a route, for instance. Routes can be segmented at the origin-and-destination or flight level, depending on the individual revenue management system.
  2. Focus on one type of segment, such as routes with high competitive intensity and high willingness to pay. Even though day-to-day performance of individual airline routes typically fluctuates widely—up to a 200% variation—it’s possible to find a control group that allows for an analysis based on the statistical variation of the pilot.
  3. Look for routes with similar characteristics—control routes—against which changes to the pilot route can be compared. Analyze routes across a series of dimensions (such as revenue per available seat mile by day and load factor and yield by day) to find the ones that behave similarly.

A Structured Approach to Cost Reduction

Transportation, Travel & Tourism
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