In this three-part series, we’ll discuss how the concept of airline revenue management is being redefined.
- Part 1: What Shapes Revenue Management in the Age of NDC?
- Part 2: The Future of Airline Revenue Management
- Part 3: The Era of Digital Marketing in Revenue Management
In Part 1 of this series, we looked at how the IATA NDC initiative is shaping a brighter future for the airline industry, while at the same time positively influencing airline revenue management.
Part 2 of this series showed us that airline revenue management technology still has a long way ahead before it reaches a state of the art solution – total offer optimization.
We also discovered that when it comes to airline business performance, despite the positive trends globally, there is still room for improvement. Passenger load factor is one of the KPIs where the potential for improvement is the most obvious.
In this final part of the series, we’ll explain some issues related to load factor.
1. Why the Current Load Factor Maximization Approach Fails
It’s not a secret that both revenue management and marketing teams directly impact passenger load factor through their daily activity. Revenue managers increase load factor through price optimization. Marketers attract additional passengers through advertising.
Historically, revenue management and marketing teams have operated in silos, even though they’re supposed to work towards the same goal – filling empty seats at the optimal price. Not only does this approach not provide the expected results, but it also creates negative side effects.
Revenue managers traditionally maximize the load factor of distressed flights by lowering the price. It’s a way to attract price-sensitive customers who would otherwise fly with a competitor or not travel at all.
This approach can cause the following negative trends:
- A lower passenger yield, as the average fare becomes lower.
- Market delusion, as passengers expect to pay a lower price in future.
- The spiral-down effect, as the revenue management system protects more seats at a lower price in the future.
At the same time, marketers tend to advertise only “attractive” destinations that provide a better return on investment.
Such an approach also results in negative trends:
- Spill (lost revenue), as revenue managers can’t react quick enough to the unexpected increase in demand.
- Negative brand perception, as business passengers struggle to find available seats close to the flight’s departure.
- Media waste, as flights that are advertised would sell out anyway.
So, how can airlines maximize the load factor while avoiding these negative side-effects?
Let’s break it down into three simple steps.
2. Three Simple Steps Towards Higher Load Factor and Revenue
Step 1: Extend Digital Transformation to Revenue Management
According to a recent study, spending on digital marketing nears $100 billion globally.
Increased marketing spending on digital channels is not new or unique to other industries. Some airlines were already spending as much as 70% of their total marketing budget back in 2017.
Airlines around the world have started to realize that technology and new ways of communication through social media dictate the rules now. In fact, digital was the number one buzzword in the airline industry in 2018.
Earlier this year, IATA called on airlines to “unlearn” past methods for digital transformation. Customer expectations have been redefined by digital disruptors such as Uber and Airbnb, so airlines also need to rethink the way they interact with customers.
So what is preventing airlines from embracing digital transformation to the full extent and throughout the entire organization?
Some of the reasons seen by industry experts include:
- The unwillingness of management to change existing business models and business processes.
- The complexity of some sectors within the aviation industry.
- Legacy technology systems and processes.
While airline marketing teams have been following the latest trends, other teams such as revenue management haven’t had the right tools in place to become a part of the digital transformation.
Lately, new entries to the airline technology market have started addressing some of those technological and process issues through innovation and a more agile approach.
Step 2: Align Objectives and Goals Between Marketing and Revenue Management
The approach to unite revenue management and marketing efforts might be new in the airline industry. However, in the hospitality industry, similar ideas were already discussed more than 10 years ago.
Such approaches have benefits not only for marketing and revenue management, but also for the entire airline.
So then, what do revenue managers have that marketers want?
Flights to advertise
- Advanced forecasting capabilities to spot distressed inventory early.
- Latest booking figures to exclude flights that are already becoming full.
Best timing to advertise
- Flight profiles and booking windows.
- Optimized pricing for each date to departure.
- Decision support information: for example, competition pricing and special events.
What do marketers have that revenue managers want?
- Customer segments for better-tailored offers and optimized pricing.
- Customer demographics to better estimate passengers’ willingness to pay.
- Customer preferences to match products with expectations.
- Extended demand information to optimize forecast and pricing.
However, until recently, there simply were no airline-specific solutions on the market that could facilitate the process of making such an exchange of information possible.
In the past, airline marketing teams would have to contact revenue management each time they ran a campaign to identify the routes that needed to be advertised. Meanwhile, others simply relied on their own intuition and advertised what they thought looked good in the eyes of the customer.
More importantly, such solutions help marketing and revenue management teams define objectives and goals in a collaborative manner, monitor the results of their joint efforts and take action upon the same issues, based on the same insights.
The process of reaching common load factor goals becomes easier for both teams. It also becomes more transparent for the whole organization, as cross-departmental tools allow the sharing of metrics with all concerned stakeholders, without investing additional time.
Step 3: Keep the End Consumer in Mind
While focusing on own goals and objectives, it’s important not to forget about the passenger. In the end, they need to do the necessary research and make the final decision.
During such extensive research, passengers start the booking process on multiple airline websites. But eventually, 81.7% of shopping carts are abandoned, as travelers struggle to find products they want.
When it comes to load factor maximization, it’s important to take all the necessary steps to ease the decision making of consumers.
To ease and shorten passengers' efforts, it’s important to use customer data generated at different touchpoints and further optimize the offer to make it as close as possible to customer needs.
It’s also important to ensure that with the abundance of all travel offers, your airline’s product really stands out. Having additional data and using it to improve the offer is exactly what can make a difference here.
Setting up abandoned cart emails would already be a good step forward. 80% of airlines don’t have this practice in place. Thanks to the latest advances in AI, such recommendations could also contain other lookalike route suggestions for customers that require some inspiration.
In the hospitality industry, relying on reviews has become the norm. According to Tripadvisor, 96% of users find reviews important when selecting a hotel. It won’t be long before such practices will also become the norm in the airline industry.
We can all agree that airlines can reach load factor and revenue goals faster, while benefiting end consumers in the era of digital marketing. So let’s “unlearn” for digital transformation.