Synopsis

Revenue Management System

In
Airline Industry

Submitted in partial fulfillment of the requirements for qualifying

MBA
Supervised By

xxxxxxxx
Submitted By

NAME: xxxxxxx

ENROLLMENT NO: xxxxxxxxxxx

Study Centre: xxxxxxxxxxxxxx

Regional centre: xxxxxxxxxxx

INDIRA GANDHI NATIONAL OPEN UNIVERSITY

School of Computer & Information Sciences

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 Revenue Management System
In
Airline Industry

Under Supervision of : xxxxxxxxxxx

Submitted By:

Name : xxxxxxxxxxx

Address : xxxxxxxxxx

Phone No : xxxxxxxxxx

Programme Code : xxxxxxxxxx

Enrollment No. : xxxxxxxxxx

Name of the Study Centre : xxxxxxxxxx

Study Centre Code : xxxxxxxxxx

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 Revenue Management System
In
Airline Industry

1. Title of the project.

2. Introduction to topic .

3. Objecective of the project.

4. Research Methodology.

5. Literature review.

6. Limitations

7. Bibliography.

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Revenue Management System
In
Airline Industry

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2. INTRODUCTION

This is a Project work undertaken in context of partial fulfillment of the MBA in

Finance. Revenue Management was invented by U.S. airlines in the 1980’s in response to
a newly deregulated industry and to the increased competition that was created. Since
then, it has been adopted by a variety of industries, and the list is constantly growing. But
the basic concepts have been around for quite a long time
It was developed by the airlines to improve revenue performance in the face of increasing
competition. It was obvious to the airlines that passengers could be divided into two
broad categories, based on their travel behavior and their sensitivity to prices. There
business and leisure travelers. Business passengers tended to make their travel
arrangements close to their departure date and stay at their destination for only a short
time. There was usually little flexibility in their plans, and they were willing to pay
higher prices for tickets. Leisure travelers, on the other hand, booked their flights well in
advance of their travel date. They stayed longer at their destinations and had much more
flexibility in their plans. They would often decide not to travel rather than pay high fares,
and flights often departed with empty seats.
The challenge to the innovators of revenue management was to devise a plan that would
make the empty seats at the lower fare while preventing passengers who were willing to
pay the higher fare from buying low-fare seats. Since low-fare passengers typically book
in before higher fare customers, the revenue management system must forecast how
many business passengers will want to book on a flight. Then it must set aside or protect
these seats so that they will be available when the business passengers request them.
Revenue Management is the process of analysing and forecasting consumer demand in
order to optimize inventory and pricing levels to maximize profitability.

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Fig 1 Process of RM
In other words, to constantly analyse and forecast the remaining demand for a certain
future product or event and subsequently adjusting the pricing levels in order to sell the
right product at the right price to the right customer at the right time to maximize
profitability.
It is important to note that Revenue Management addresses the revenue side of the
equitation, not the cost side. There exists an inverse proportionality between Load Factor
(Units Sold) and Average Yield (Unit Revenue) and Revenue Management will thus find
the optimum balance between these factors in order to maximise Revenue or Income.

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3 .OBJECTIVE OF THE STUDY:-

Revenue Management Objectives

 Produce a demand forecast based on market data, commercial objectives, and
calendar-related events

 Adjust demand forecasts based on environmental changes, management

guidelines, and performance metrics

 Set up and manage an allocation strategy using the revenue management system
tools in a systematic and efficient manner

 Prioritize administrative tasks

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4. RESEARCH METHODOLOGY

Research Methodology
This research is Analytical with qualitative approach. In Analytical research, the
researcher has to use facts or information already available, and analyze these to make a
critical evaluation of the material. So, here in this project I have collected data, mainly
from the secondary sources. In primary source, I have talked to one Revenue
Management expert, Mr. Suresh Menon, Official of Revenue Management Training
group, in Jet Airways. Based on the information from Mr. Suresh and various secondary
sources, I go through the revenue management scenario worldwide and able to analyze its
current and futuristic trends. Also find new Revenue Management Strategies and
challenges and to some extent try to predict future of the Revenue Management based on
the industry experts views. the basis of data collected from the primary and secondary
Sources the Key Areas of Revenue Management are

1) ForecastingForecasting is an important component of planning in any enterprise; but

it is particularly critical in airline revenue management because of the direct influence
forecasts have on the booking limits that determine airline profits. Forecasting for
airline revenue management system is inherently difficult. Competitive actions,
seasonal factors, the economic environment, and the constant fare changes are a few
of the hurdles that must be overcome. In addition, the fact that most of the historical
data is censored further complicates the problem

2) PricingPricing has been around as long as people have traded. Pricing of product or
services represents the knowledge and understanding of their product and ultimately
determines the growth prospectus of the organization. If product and /or service is not
exclusive or not providing the desired satisfaction to the customer or unable to give

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 value for money, will not succeed. On the other hand if product and/or service has
high level of customer satisfaction and high manufacturing /operating costs it will
lead to increase in the time period of reaching its break even point and loss of
revenue. Thus price is to be determined in such a way that firm can reap the profit of
increase in demand and let customers to take the advantage of availability of product
and/or service

3)Seat Inventory Control Inventory control system basically means the procedure by
which the product or the finished commodity is being controlled in the market. The
system depends upon the commodity that is being offered by the producer, if the
commodity is perishable the inventory system is different from that of for durable goods.
But when we talk about service industry we don’t think of a commodity rather we think
of a service, for e.g. like in Aviation industry. They don’t offer a tangible commodity
rather they offer a product which can be experience but can't be touched or felt. As we
talk about FMCG market we get a tangible commodity in hand but when we compare it
with Aviation sector we get an intangible commodity in terms of experience.

4)Overbooking The travel industries in particular are plagued by the problem of “no-
shows” – people who book inventory and then do not show up to use it (or pay for it).
The attachments of cancellation penalties to airline discount fares are attempts to mitigate
this problem, which have met with some success. To compensate for no-shows, travel
firms “overbook” their capacity, trading off the possibility of empty units if they don’t
overbook enough against the ill will and out-of-pocket compensation to customers that
occurs when customers are “bumped” (airlines).

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5 LITRATURE REVIEW:

Davis M 1994, ‘yield management techniques are reportedly quite valuable. On an

estimate American airline made an extra $500 million per year based on its yield
management techniques’. According to an estimate the pricing system used by American
airlines change the prices more then half a million per day.
Deneckere and McAfee 1996, ‘Revenue management techniques provide tools to use
consumer surplus through dynamic pricing’. Nevertheless there is little doubt that
dynamic price discrimination is economically important. The pricing system by most
major airlines is opaque to the customer. The only thigh which customer came to know
about the airline is the quality of service. By applying the dynamic pricing techniques and
by providing best services to the customer, airlines can increase the revenue and also the
loyalty of the customer to the brand.
Geraghty, Kevin 2004, ‘Revenue management offered us a way to capture revenues that
were being left on the table. Revenue management implements the basic principle of
supply and demand economics in a tactical way to generate incremental revenues.’
Airlines monitor through the use of specialized software how seats are being reserved and
react accordingly, for example by offering discounts when it appears as if seats will
otherwise be vacant. During peak season airline charge the passenger as much as they can
and offer products to those who are willing to pay more while in lean season various
marketing techniques like free companion scheme, discounted one way fares, returned
fares, excursion fares and basket scheme etc. are being offered by airline according to
their marketing model.

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Andy Boyd,2003,‘One-way airlines segregate customers is by imposing advance
purchase requirements and Saturday night stays for cheap tickets. These restrictions act
as ``gates'' that separate price-sensitive leisure travelers from time-sensitive business
travelers. The challenge for other industries is to find the right gates’. The sensitivity of
demand can be controlled to some extent if an airline has a good no of loyal customers
and an ability to attract new customers even at the time of low demand.
Sengupta A,2006,‘Airlines that use revenue management periodically review
transactions for services already supplied and for services that are to be supplied in
future. They may review information such as past statistics, up coming events like sports,
holidays, festival or unexpected past events such as terrorist attacks and other information
SUCH as competitive information (including prices), seasonal patterns, and other
pertinent factors that affect sales.’ The success of an airline depends upon the capability
of the air line to forecast the future and deploy the maximum capacity on the routes with
comparatively high demand but by taking the cost of operation into consideration.
Belobaba 2003, ‘Airline who is busy in maintaining its load factors by decreasing its fare
with analyzing that it can harm its future policies. These airlines are more susceptible to
go out of the picture.” Revenue management system provides enables airlines to satisfy
customer and made profits to the greater possible extent without any lose of image.

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6. Future of Revenue Management
What will drive the future of RM?
 Pricing transparency

 Computing power and database manipulation

 Understanding of consumer behavior (especially web analytics)

 Consumer tolerance for being ‘RM’d’.

Pricing transparency has grown quickly over the past several years. From the days when
pricing was transparent only to the travel agent, to the advent of online agencies like
Expedia, Travelocity and Orbitz, to the creation of information conduits, like Kayak and
Sidekick. Such transparency has made the other airline’s selling price much more
relevant to the determination of my optimal selling price, such that RM systems will need
to get much better at knowing the competition’s price and incorporating it into the
calculation of future demand and the elasticity of demand. I expect that airlines will
figure this out, gradually, over the next ten years.
Computing power will make the incorporation of competitive prices viable. It will also
enable more tailored offerings (such as genuine one-to-one pricing), as airlines learn how
to use what they know about a customer to alter the offering.

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