Page 92 - AAA JANUARY - FEBRUARY 2017 Online Magazine

COLUMN HAZEM HUSSEIN

Back to the Future

Airlines are already looking at addressing tomorrow’s challenges

ave you ever been caught out it’s essential for airline profitability. In an classes etc. in the economy cabin – and
waiting one more day to book your intensely competitive environment with high fenced using fare rules such as advance
flight, only to find it’s now US$500 fixed costs, every dollar counts. purchase, minimum stay, flight restrictions
Hmore expensive? Or wondered In fact it’s good for customers too. On one and more. This allowed for a more refined
why booking late is often excruciatingly hand it gives travellers on a budget a chance customer segmentation to maximise
expensive, but sometimes also the way to bag to get that bargain; on the other, it sets aside revenues. Technology had advanced enough
a last minute bargain? Perhaps you’ve also seats at a higher fare for travellers who really to enable airlines to begin forecasting
questioned how it’s possible to have a dozen need them, regardless of price. demand on certain journey segments.
different fares for the same economy seat? However, the focus was on understanding
Maybe you’ve chalked it up to simple Back in the Day When Things were the revenue impact of each leg, rather than
supply and demand. In fact what you’ve Easier the overall traveller journey.
witnessed is revenue management at work Revenue management has been instrumental
– a complex, algorithm-based system that for airlines for many years, and as with many Entering an Era of Transformation
aims to maximise the profit on each flight. It things, was simpler back in the early days By the 1990s major transformation was
works by forecasting demand, segmenting of air travel. If we look back to the 1970s, underway. A few pioneering airlines started
customers, and optimising fare availability competition was lower, airfares were more to put focus on origin and destination (O&D)
by deciding how many seats to sell at each regulated, and airlines generally offered revenue management, focusing on how
fare level at any one point in time. just two fare classes: business and leisure. to optimise their entire network, not just
The core concept here is price These classes were clearly fenced from each individual legs. Adding complexity here was the
discrimination by segmentation – charging other, and the airline’s priority was to woo increasing number of connections, routings and
different customer types different prices for as many who could afford to travel on board codeshares between alliance partners.
the same product based on their willingness and at the same time manage overbooking. A bigger shift, though, was the unseen
to pay. A leisure traveller from Singapore Revenue management played its part, but it game changer. The internet. Travellers had
to Hong Kong booking two months in was quite rudimentary. started booking their own flights. Online
advance may only be willing to pay $400 for By the 1980s, competition had flourished, travel agencies became a key distribution
an economy seat on a full-service carrier, new routes had opened, and fares had channel, upping the ante on an already
whereas a business executive who is bound dropped – which meant airlines needed to competitive sector, and travellers now had
by obligations would fork out US$700 for be clever to remain profitable. Number of access to greater transparency and the ability
the same seat. It sounds pretty ruthless, but fare classes increased – think Y, B, E booking to compare prices easily. It also had another
side-effect – accelerating the popularity of
low-cost carriers (LCC) with their simplified,
pay-for-what-you-need products.
Adapt or Disappear
Full-service airlines had to adapt or
disappear. Most were able to do the former
by emulating LCCs’ effective merchandising
practices – unbundling the travel experience.
By doing so, they could increase revenue
capture per passenger, at the same time
avoid a ‘race to the bottom’ price war.
But unbundling had a perception
problem: it upset some customers who
were used to the full service experience. So
airlines started focusing on the customer
perception of value through “fare branding”
92 ASIAN AIRLINES & AEROSPACE JANUARY / FEBRUARY 2017 WWW.GBP.COM.SG/AAA