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 recent years, the airline industry has begun to actively move through a major technological transformation. The journey to digitalization and modern-day online retailing means improving the passenger purchasing experience by making it quicker, more transparent and hassle-free.
Airlines have lagged behind other industries in the use of modern technologies and the latest e-commerce techniques. However, a real chance to revamp the industry presented itself when IATA approved the New Distribution Capability (NDC) standard back in 2012.
New Distribution Capability
Although it gave airlines hope for flexible retailing capabilities, NDC also brought what every major change brings – an uncertain future.
Seven years later, a fair share of uncertainty still exists. But significant progress has been achieved in defining how that future with NDC might look like and what would be required for the airline to get there. A critical mass has made an effort towards NDC:
68 airlines, 59 vendors, 20 aggregators and 22 sellers are now NDC-certified or NDC/XML capable.
Despite the NDC initiative only beginning to materialize in real life, such a change has already influenced numerous areas of airline commercial activity. This includes airline revenue management.
Let's take a closer look at this. What are the latest trends and concepts that have been influenced by NDC so far?
1. Merchandising Solutions
Ancillary revenue now accounts for 93 billion USD per year. This is equivalent to 10.7% of total airline revenue. And it keeps growing. In 2018 alone, ancillary revenue increased by 13% for airlines globally.
However, the ability to optimize the price of ancillary products efficiently has become a key issue for many airlines.
While attempting to solve this issue, merchandising IT solutions have gained popularity in the last couple of years. They provided airlines with helpful tools to build offers for their customers more dynamically while optimizing ancillary revenue.
At the same time, this triggered the creation of new ancillary and merchandising-related roles within airline organizations.
These are just the first steps of a long journey. In the future, we might see further developments to integrate airline merchandising solutions with the revenue management systems more closely. This would allow additional upsell opportunities that are not possible today.
Having more integration between those two systems would also bring airlines one step closer to implementing the holy grail of airline revenue management – total offer optimization.
At the same time, this would provide better collaboration capabilities between traditional revenue management roles and newly emerging merchandising roles within airlines.
Progress with merchandising solutions is enabling basic dynamic offer creation for airlines. But significant room for improvement still exists and must be addressed before airline retailing capabilities can match other industries.
Amazon recommendations already count for 35% of what their customers purchase. The number is even higher for Netflix – 75% of Netflix users watch recommended films and shows.
Creating relevant recommendations in real-time for airline customers, however, represents a higher challenge. The number of elements that make up the product keeps increasing. It will be even more challenging in the future with the addition of accommodation options and other third-party content.
Pricing such real-time recommendations requires a more dynamic approach. This leads us to the next concept dictating the future of airline revenue management – dynamic pricing.
2. Dynamic Pricing
Proving Its Worth
Dynamic pricing is not a new concept. It’s been used by companies like Amazon, Orbitz and Staples to drive additional revenues, years before airlines started implementing it.
In the airline industry, however, the concept of dynamic pricing was waiting for better days. This was due to the inability of legacy systems to support such frequent price updates. There was also a lack of evidence that dynamic pricing would successfully perform in a competitive environment without generating a buy-down effect.
One of the first airline-related studies by PODS Research LLC showed an increase in revenue for airlines using dynamic pricing. This provided some reassurance that the dynamic pricing concept could be applied in the competitive airline market.
What's Needed Now?
Despite this, the necessary infrastructure is still missing to implement airline dynamic pricing in all sales channels. Current flows rely heavily on a booking class concept. More time is needed before completely classless dynamic pricing can be possible.
It would also be beneficial to have more alignment around the concept of dynamic pricing within the airline industry. Different vendors and airlines currently interpret it in different ways, ranging from predefined price mark-ups, based on user-driven rules, to customer choice modeling and more science-backed solutions.
Complexity around dynamic pricing still hasn’t reached its peak. It will further increase in the future with more advanced dynamic offer creation capabilities. The number of product elements and price points to optimize would be much higher. It would require not only more sophisticated algorithms but also higher processing power.
This raises a valid question. Will we encounter completely new entries with experience in other industries, who will step into the airline market and solve these problems?
It’s quite likely. As the airline industry was resistant to changes for such a long time, it gave rise to smaller IT companies and startups looking to solve those challenges more efficiently. They have done this through early adoption of new technologies, application of data science or a more dynamic and agile working approach.
Reaching True Personalization
Personalization is one of the topics widely debated in the airline industry. This includes the use of personalization techniques in revenue management.
According to a recent report, 75% of consumers prefer to buy from retailers that recommend options based on past purchases. Meanwhile, 59% admitted that personalization influences their shopping decision.
Despite high interest and an urgent need to personalize every offer, so far very few examples of true real-time personalization have been demonstrated in the airline arena.
True personalization would mean knowing customers and their product preferences, being able to identify them in the shopping session and providing a consistent personalized experience before, during and after the flight.
Currently, such personalization capabilities vary from one channel to another. In the channels where airlines have less control, true personalization is nearly impossible today.
This is once again consistent with the global trends. Only 4% of marketers feel like their channels are powered by intelligence-driven, real-time, personalized experiences.
There’s an almost complete lack of personalization capabilities in airline revenue management today. Even current techniques that marketers been mastering for years now could be considered as advanced for revenue managers.
Sharing current marketing insights and technology with revenue management teams could be a logical next step in the current personalization race.
When it comes to revenue management, we could say that what was presented as personalization so far, is mainly contextualization.
Today, most airline revenue management departments don’t have enough data about their customers to build truly personalized products. At the same time, a majority of airlines rely on revenue management solutions that by design do not allow real-time interactions with the customer.
In such a context, relying on “what if” scenarios and pre-defined rules meant to optimize the price, based on the passenger's characteristics, is a logical approach. It doesn’t provide the full benefits that a science-based approach or AI algorithms could bring. But in the current situation where those advanced tools are not yet available, it helps.
We shouldn’t forget that as opposed to the Amazon approach, an airline’s capacity is limited in both numbers and time. Therefore the approach to satisfy every customer won’t work from an airline revenue management perspective.
What we can say with certainty, is that the right approach to personalization is still to be discovered by airline revenue management teams. Sharing the data throughout the airline and finding the right tools for its utilization will certainly play a major role.
4. Big Data and Machine Learning
The Challenges of So Much Data
The use of machine learning and big data in airline revenue management is yet another topic that has been discussed a lot recently. However, not many concrete use cases have been implemented so far.
The circulation of data within airlines is still not at its best. Most airlines don’t have the right infrastructure and resources in place to work with big data.
According to research at the Amrita School of Engineering, a single flight can generate up to 1000 gigabytes of data. Even though revenue management data would only represent a fraction of it, having this data structured and accessible to revenue managers still presents a challenge.
Airline revenue management teams are already overloaded with manual tasks. Adding more data into their workflows without offloading existing routines just won’t work. Furthermore, training revenue managers in data science would take time and disrupt their current activities.
So then, how can airlines introduce big data to revenue management departments while avoiding those challenges?
The Solution: Machine Learning
In other industries, the number of machine learning pilots and implementations in 2018 has doubled. A number of these implementations were introduced to solve exactly the same problem that airline revenue management faces – making sense of large data sets.
There’s a close link between successful data handling and machine learning techniques, and having airline data scientists and operational research teams work closely with revenue management. Acknowledging this would be an important step towards better-analyzed revenue management decisions and automation.
In other words, big data should become a priority. Not only for the teams that work with it but for the entire airline organization. Making data available to different teams, so they can leverage what already exists, would eventually benefit the entire airline.
5. Real-Time Revenue Management Systems
Here’s where we come to perhaps the biggest change NDC may bring to airline revenue management. A new capability for revenue management systems to interact with the sales channel and make decisions in real-time, without the middleman – passenger service systems.
Ensuring the necessary processing capabilities to support such real-time interactions was itself a problem. This has prevented airlines and vendors from implementing such use cases.
However, cloud technologies recently took a key role in data processing optimization. It has potential benefits, ranging from cost-saving to resilience and the prevention of IT shutdowns.
In fact, close to 77% of all enterprises could become cloud-first in the nearest future.
The first cloud-based implementation is only starting to arise within airline revenue management. Meanwhile, airlines can already see the potential in many more use cases to come with NDC.
With all the new emerging technologies and advantages that NDC will bring, can we really say that the challenges of airline revenue management will be over?
Not necessarily. In Part 2 of this article, we’ll have a look at the remaining revenue management challenges and potential solutions.