Carriers Melding Revenue Mgmt. And CRM Systems

<B>Carriers Melding Revenue Mgmt. And CRM Systems</B>

By David Jonas

The science of revenue management is becoming even more sophisticated--and important--as airlines attempt to integrate pricing with customer relationship management and e-commerce initiatives. Though the idea already is several years old at some carriers, effective integration has remained elusive. Some carriers, notably Continental Airlines, also are looking at dynamic equipment allocation systems to maximize aircraft usage based on demand.

Taking into account the weakening economy and an increasingly congested commercial air traffic infrastructure, revenue management will remain a top priority. "If you look at the state of demand in the European and U.S. airline industries, you can see real issues in terms of revenue growth. Hub-based carriers are running out of capacity and won't be able to add many more flights, so incremental revenues will have to come from higher yields," said Ron Stewart, global managing partner for Accenture's transportation and travel services division. "British Airways fundamentally executed that strategy and really moved up its yield per passenger. And now look at their profits versus North American carriers."

Accenture, formerly Andersen Consulting, provides revenue management consulting to numerous global airlines, and is focusing particularly on tying a carrier's revenue management strategy to emerging CRM strategies.

"Traditionally, revenue management has been based on historical transactional trends and demand patterns, but not at all with the customer on the other end of the phone," Stewart said. "Now, we firmly believe the next generation simply is applying the customer relationship to pricing disciplines, based on individual customer preferences and specific price elasticity."

Accenture predicted that the potential benefit of its customer-centric revenue management philosophy for airline clients could add anywhere from 4 percent to 33 percent in incremental revenue, with an estimated average of 8 percent. And for corporate clients, especially those that book directly with carriers, that ultimately could mean more consistent and appropriate treatment for their frequent travelers.

Recognizing such potential, Continental, for one, actively is pursuing an entwined CRM-revenue management approach. In fact, its technology and distribution planning groups are seeking maximum revenue optimization by working with customer information systems to create one-to-one pricing structures, the Holy Grail of revenue management. "The airline industry is all about segmentation," said Jim Compton, Continental senior vice president of pricing and revenue management. "As you go direct, you develop the ability to see exactly what each customer is willing to pay."

However, one-to-one pricing, for the most part, still is in the conceptual stage, and America West Airlines vice president of revenue management Ted Botimer questions whether the industry ever will progress to that level. "As always, it's a small numbers problem," he said. "You can't get a suitable model to attach a specific value at the individual customer level, or even for small customer segments. You always have to start grouping those segments together." America West is implementing an advanced core yield management system furnished by Manugistics of Rockville, Md., which in December acquired Talus Solutions.

Stewart said developing customer revenue management systems first requires a focused customer strategy that includes pricing, subsequent customer database construction to mesh disparate systems and then migrating data to the front-line reservations systems, gate agents, etc. And that doesn't come cheap, which concerns airlines now mired in a slumping economy.

Accenture, however, is advocating a shared utility program, whereby carriers use a common platform and pay based on usage and/or number of passengers. "We can build the same set of technologies one time and leverage the common assets across multiple carriers," said Accenture's Stewart. "It simplifies complexity, reduces the airlines' investment risk and makes for a faster process, since infrastructure already is built." He added that alliances would be ideal candidates for such a system and feedback thus far has been extremely positive.

Meanwhile, carriers already are exploring revenue management in the context of emerging distribution options in an e-commerce world. Delta Air Lines, for example, recently established a new team charged with bringing pricing and inventory distribution to the Web. The team is led by Kevin Connor, now director of e-commerce revenue management and distribution strategy. The new e-commerce revenue management team "will develop global revenue management strategies that support Delta's overall corporate e-business vision, while complementing its traditional pricing methods."

Continental, too, is looking to adapt. "We are beginning to think of the true value of a fare and how effectively you can manage revenue based on distribution," Compton said. "Because most revenue traditionally has been brought in by agencies, and the cost to us is consistent, you wouldn't care about the distribution costs on an average $200 fare. But as distribution options have grown--via the Internet--and you remove distribution costs, that $200 may have a different net value depending on where it comes from."

<B>Demand-Driven Dispatch</B>

Bringing the highly connected inventory management discipline into the equation, Continental also is working on demand-driven dispatch, a strategy that dynamically places an appropriate-size plane in a given market, based on changing demand. The carrier's numerous Boeing 737 configurations--ranging from the 104-seat 737-500 to the 155-seat 737-800--each can be flown by the same cabin crews and therefore provide an added level of flexibility. As departure time nears, Continental can adjust up or down. "Forecasts can be wrong, fares can change and the market conditions can change," Compton said. "But now that the 737 fleet has become so varied, we have had some early successes with demand-driven dispatch."

The concept also can be applied to the Continental Express operation by matching the correct-size regional jets with current demand on certain routes. However, such carriers as American and United Airlines, with heterogeneous fleets--perhaps more so in the wake of industry consolidation--could have more difficulty deriving value from demand-driven dispatch.

America West hopes to implement a new flight firming system that will cancel bookings that have not been ticketed within preset limits. It said more advanced flight firming will reduce the necessary level of overbookings.

Overbooking is another area where CRM can be valuable. "Right now, overbookings are based on broad-based cancellation rates for a given flight, which is a very macro-level way of looking at things," Accenture's Stewart said. "But if the carrier knew who was on that flight and what their particular behaviors are in terms of not showing, they would have a much better prediction than what is available today."

Though airlines must make internal decisions on pricing and inventory specifics, most outsource for existing applications and new software development from third-party vendors. The most visible are Houston-based Pros Revenue Management, Sabre and Manugistics.

Meanwhile, American Airlines said that by mid-year it will insource strategic application development, supporting revenue management and capacity planning. Those functions currently are handled by Sabre.