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Airline Revenue Management

This article is an attempt to explain the challenges of revenue management in Nigeria’s airline industry.

Revenue management is still in it’s infancy in Nigeria. Aero contractors have pioneered the field of Revenue Management in the West African sub-region. In time past airlines had fixed fares for their business and economy cabins, pricing was not dynamic. Day to day demand for airline seats was not considered an important factor in pricing, in other wards, airlines fixed a price and hoped that customers will buy and fly. Inevitably a lot of seats where not utilized and the max revenue potential for most airlines was squandered.

To truly maximize every available resource certain key factors have to be considered. First and foremost the primary resource for any airline running a scheduled service is the aircraft seats, these seats are perishable items; they are no different from farm produce that have very short shelf life. It is very important to understand that once a flight departs, the opportunity to sell is lost and can never be recovered again.

The price of an airline seat is determined by the perceived value of that seat to the customer. The trick is in understanding the behaviour of the customer, anticipating when he or she is most willing to pay premium and knowing when the customer is unwilling to part with money. A typical scenario would be an early morning flight from Lagos to Abuja on a Monday morning. What you notice from the demographics of the passengers is that most are business travelers and as such are more willing to pay a premium for the trip as against passengers traveling on a Wednesday from Abuja to Lagos just for leisure.

Another factor to consider are the routes themselves. Every route has a distinct personality and this is largely driven by the people and the commercial or political activity in the city pair. People from certain geographic locations like Port-Harcourt, generally earn more income largely because of the economic and political activity taking place there and as such would be able to pay a premium for the seats. On the contrary other destinations like Benin or Kaduna are purely for leisure travellers and civil servants, therefore pricing is done to accommodate these peculiarities. It’s also important to know the historical link between a city pair if any, is there demand for travel between the city pair, what kind of load factor (percentage of seats utilized in an aircraft) and average yield are other airline doing on the route.  Movement of passenger should be from point to point, avoiding connections. An example is flights from Lagos to Kano. A lot of airlines fly passengers from Lagos to Kano connecting through Abuja. These connections cause complexities that may eat away at an airlines profits.

A revenue analyst uses demand forecasts to make informed decisions on the best way to optimize a flight. Forecast are made from historical data. Passenger movement tend to have a consistent pattern, demand for seats are different from hour to hour, day of week, monthly and festive seasons. All these are factored into the decision making process for the optimization (maximizing the use of all available resource to achieve its fullest revenue potential) of flights. For a modern airline, with a modest fleet size of seven aircraft and daily frequency of about 50 flights, manually analyzing data and making forecasts for optimization becomes too cumbersome. A decision support tool becomes essential in aiding the analyst manage the airline’s entire inventory.

An important part of Revenue management is the pricing structure. Most Nigerian airline in the country offer only four fares. This is not adequate for the strategy that requires a revenue manager to respond to passenger demands dynamically. There is no limitation to the number of fares allowed in a revenue management system. In theory optimization is simple: anticipate an increase in demand and charge passengers as high as you can, when demand drops, respond to it by dumping fares. This achieves two purposes, it enables you keep your load factors high by giving an incentive for people to travel even when they don’t need to. You might make losses on some flights with very low demand, but you can make up for your losses with flights that are of high demand. The big picture is the total revenue generated at the end of month, achieving your set revenue goals is a carefully orchestrated balancing act. It’s both a science and an art; under the right conditions meeting your revenue targets is always possible.

An aspect that cannot be ignored in achieving your set revenue goals is service delivery. This presents the biggest challenge in Nigerian domestic airline industry. Selling a ticket is one thing, delivering the passenger to the desired destination, is another. The first challenge is the lack of a uniform fleet. Aero uses 2 different configuration of the Boeing 737 these are the Boeing 737-500 and the Boeing 737-400. The 500series is smaller in capacity than the 400series. The flight schedule is planned with specific aircraft flying a specified route. With advanced purchase, we get to fill up the aircraft days before the flight; any last minute change will result in revenue loss. Unplanned maintenance could cause loss of revenue, aircraft being pulled out of the schedule, will lead to flight cancellation. The airline operating environment is like a battle zone and the outcome of your best made plan is never certain. Planning and proper execution are the keys to ensuring a continuous flow of revenue.

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Comments on: "Airline Revenue Management" (1)

  1. Thanks for posting. Goo posting.

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