Revenue Management and Customer Centricity

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Customer Strategist Dietrich Chen: Revenue Management and Customer Centricity -- Imperatives in an Era of Consolidation

Customer Strategist Dietrich Chen: Revenue Management and Customer Centricity -- Imperatives in an Era of Consolidation

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The recent news about Southwest and Airtran merging, which was closely followed by the approval of the pending merger between United and Continental, continues the consolidation in the airline industry that started in 2008 with the Delta and Northwest merger. These changes provide more than opportunity; they signal a need for change. Airlines today must integrate their revenue management and loyalty program data to gain a competitive advantage. Doing so will help to increase customer value, profitability, and retention.

We won't rehash in detail the pros and cons of these airline mergers as every news publication has laid them out already for their readers. A still-recovering economy has continued to put enormous pressure on the travel industry, and while price points and occupancy levels seem to be slowly recovering, they are still a far cry off from the industry's heyday. Economies of scale, access to new markets, and the growth imperatives dictated by Wall Street surely played an important role in the recent merger fever. It would not come as a surprise if there is more to come in the near future as other airlines, primarily American Airlines, see their market position eroded and threatened by the recent merger activities. Alaska Airlines, USAir, or perhaps even JetBlue are all potential merger candidates.



It is interesting, however, to note the differences between the Southwest/Airtran and the United/Continental announcements. As a low-cost carrier, Southwest highlights access to new important markets such as Atlanta, Washington, New York City, and its first forays into international territory. United and Continental, on the other hand, wasted no time contacting its frequent fliers to assuage any concerns. On the day the merger was approved the two airlines sent an email to their respective frequent fliers explaining that nothing will change in terms of accruing miles and retaining elite status. In fact, in about a month, elite members from United and Continental will receive reciprocal access to complimentary elite upgrades and other benefits.
Both deals represent opportunities for the respective players as they go through the integration process to rethink the revenue management imperatives that have permeated the industry for decades now. Often described as selling the right seats to the right customer at the right time for the right price, revenue management has played an important role in the airline industry and has found a following in other verticals, as well, such as hotels, cruise lines, and rental car companies.
In simple terms, revenue management algorithms today manage inventory controls for the myriad of fare classes that exist for any given flight. Do we shut off lower fares because our forecasts and competitive analyses lead us to believe that demand for higher fares will materialize? Or will we be too restrictive, which will lead to seats going empty? These algorithms manipulate an enormous amount of data and are complex and computer-intensive. However, today, these algorithms optimize matching inventory to demand for a given route. This transaction-focused approach does not take into account the value of repeat business that airlines' most valuable customers -frequent fliers - contribute to the business.
Loyalty programs that have been launched with great success do recognize that fact. Loyalty programs not only serve as a way to identify an airline's most valuable customers, but also provide a way to balance short-term revenue management goals with long-term optimization of frequent fliers' lifetime value .
The question, or challenge, is how to better integrate and align both functions that are separate in today's environment: revenue management and loyalty programs.
Revenue management may dictate displacing a customer looking to purchase a particular fare because it forecasts that demand for higher fares will materialize before the flight takes off. But what if that displaced customer is a one with high lifetime value?
A more holistic view of revenue optimization should estimate the impact of displacing that customer on the future expected revenue earned from him. In other words, granting that customer access to a lower fare would result in suboptimal "transactional" revenue optimization for this flight, but would achieve a higher overall revenue score when viewed as part of a net present value calculation.
Combining both disciplines will require the development of new methodologies and change in the way business is currently done. Technological advances and the creation of loyalty programs that track every flight purchased in the past for an airline's frequent fliers make it possible to take revenue management to its next level. Revenue management was an important contribution in the airline industry and has the potential to innovate the industry even more when we can integrate a customer-centric view such as loyalty into revenue optimization. The effects will not only be felt in a positive way by the airline, but by its customers, as well. By integrating customer-centric metrics such as loyalty more closely into a customer's purchasing decision, both airline and customer will come out ahead.
Whether or not an airline is involved in the current deal frenzy, integrating revenue management and loyalty is more important now than ever before. With consolidation continuing, forward-thinking airline executives have the opportunity to gain a competitive advantage by incorporating loyalty data into revenue management - and possibly change the industry's dynamics once again.
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Dietrich Chen is a director with Peppers & Rogers Group and an adjunct professor at the University of Miami.