Revenue Management Teams With Electronic Commerce

<B> Revenue Management Teams With Electronic Commerce</B>

By Bob Cross

Every 20 years or so, there are revolutionary events that radically change the economics of the travel industry. Savvy companies see these generational epochs coming and take advantage of them. Laggards are overcome by them. In the 1950s and '60s, the advent of jet air transportation made air travel relatively inexpensive, and helped create a global economy. In the '70s and '80s, the event that altered the economic landscape was airline deregulation.

I was in Chicago last week speaking to a group of utility industry execs who are facing the deregulation of their industry. They were eager to learn from the airline industry's experience.

My message to them, for the most part, was a positive one. After a chaotic start, airline deregulation has been a benefit to the entire travel industry. However, this did not occur without some short-term pain.

In the 20 years prior to deregulation, there were no new airlines and no airline failures. In the 20 years since, 200 airlines have been created and 170 have failed. Average airline yields (in terms of constant dollars) have fallen from 13.51 cents per passenger mile to 7.89 cents per passenger mile.

On the other hand, airline profits have increased substantially as a result of significant productivity gains. Some of the productivity gains came from cost reductions, but most came from a more efficient utilization of capacity as a result of the adoption of sophisticated revenue management systems. Using these systems, airlines have been able to target new market segments with significantly lower fares, which are applied to specific seats on specific flights. As a result, airline load factors have increased from 55.61 to 69.08 percent.

Despite some views to the contrary, airline deregulation has resulted in more competition and greater customer choice. I was astounded at the options I had in booking my flight from Atlanta to Chicago. There were 378 scheduled flights, each way, per day! I had a choice of fares ranging between $77 each way if I booked in advance to $569 if I waited until the last minute. Of course, the airlines revenue management systems would have made sure there was a seat saved at the highest price, had I waited.

The boom in air travel that resulted from deregulation has benefited the whole industry: Increasing air travel proportionately increased the demand for ground transportation and lodging. Most hotel and rental car firms have also learned to use revenue management to increase profits by selling cheaper rates where they have excess capacity, and upselling rates where demand is strong.

My message to the utility executives was that the transition from a regulated economy to a market-based economy would be difficult, but that it could be successfully navigated with systems such as revenue management, which predict customer demand and optimize competitive response.

In preparing for my speech, I was distracted by thoughts of the next revolutionary event that would drive changes to the travel industry. That epoch will have an impact at least as great as deregulation, creating productivity gains and market expansion at the same magnitude. Like deregulation, it will be accompanied by a certain amount of market chaos, and the gains will come at the cost of those who are not prepared.

That epochal event is e-commerce. While I'm reluctant to join the chorus of pundits who hype the coming of the Internet economy, I must. The early results show that e-commerce is exceeding even some of the most outrageous expectations.

A recent study by the University of Texas Center for Research in E-Commerce found that the impact of the Internet on the economy is even bigger than first estimated. The study determined that, in 1998, the Web accounted for over $300 billion in U.S. revenue, making the U.S.-based Internet economy 18th in the world in terms of GDP, just behind Switzerland. Of that $300 billion, two-thirds was spent on Internet infrastructure and applications, and $100 billion was commerce which was enabled by the Internet. This results from a 174 percent compounded annual growth rate since 1995, compared with a 3.8 percent annual growth rate for the economy as a whole.

To put this in perspective, the world's airline industry is about $240 billion and growing at a 5.5 percent rate.

The travel industry is investing significantly in Internet infrastructure. However, most of the Web-based investment has been to increase operational efficiency, improve customer service and offer alternative marketing and sales efforts. The latter is more to cut distribution costs than create a competitive advantage. This lack of a coordinated Internet effort can lead to customer confusion.

The Wall Street Journal recently reported the frustration of business travelers, who could find seats on the same flight through Web-based search engines at one-quarter of what the airlines sites offered. Airlines have invested in making their sites easier to use, but most are missing the ability to exploit market opportunities by tying their Web-based distribution strategy to their revenue management strategy. This is true for virtually all travel companies.

Travel providers continue to make great strides in exploiting the ability of revenue management systems to maximize profits from differentiating market segments and making real-time price and availability changes: Airlines are managing by passenger origin and destination; hotels by length of stay; and car rental firms by length of rent. They are constantly improving forecasting and optimization models to squeeze more revenue from market opportunities. However, these improvements are virtually all limited to capacity management, which is expected to be sold through the traditional distribution systems. They do not address the 30 to 35 percent of the travel industry capacity that remains unsold, including 500,000 airline seats per day.

Most travel industry efforts to use the Internet for competitive advantage are ad hoc or uncoordinated. Some have a hodge podge of auctions, last-minute e-specials, and secret e-mail deals. They look at alternative Internet distribution channels as a cost-saving opportunity or a dumping ground for distressed inventory, instead of as a facilitator for a new way of doing business.

The epochal change in the industry that will boost productivity and market expansion will come when the travel providers integrate their e-commerce solutions with their revenue management strategies.

Revenue management systems must be redesigned to incorporate the potential value of the traffic in the channel. They can help the provider determine how much inventory should be made available to what channel and under what terms. They also can monitor the changes in value on a real-time basis and predict the future values of the various channels.

Once inventory is committed to a channel, the revenue management systems can make dynamic adjustments to manage the individual transactions within the channels or reallocate the inventory among distribution channels.

Business travelers too will benefit, with the choice of a variety of new channels enabling the best possible deals at the last minute for a premium.

The savvy companies that see this epochal change and exploit the world of e-commerce with revenue management techniques will share in tens of billions of dollars of wealth creation. The rest will be lost.

<I>Bob Cross is chairman of Talus Solutions Inc. of Atlanta and author of the New York Times business bestseller, "Revenue Management: Hardcore Tactics for Market Domination.