Shifting travel patterns create new opportunities for Revenue Management, says JourneyHero’s Shane Batt
Often called a ‘dark art’, Revenue Management (RM) influences pretty much everything travel, including the hotels we pick, how, where, when and for how long we go – even if we haven’t heard of it. Its use in the travel sector is ubiquitous. It allows companies like airlines, hotels and car rentals to sell as many seats (or rooms, or cars, etc) as possible and maximise revenue in an industry of largely fixed supply but variable demand. As they say in the theatre, ‘bums on seats, laddie’. Or, at least, that was how it worked.
RM did very well for decades. Then along came Covid-19 and, like so much else, turned theory on its head. Travel bans seriously disrupted the system but for the curious traveller there are new opportunities.
Impact on travellers
The purpose of RM is to sell “the right product to the right customer at the right time to the right price” according to Robert Cross in his book ‘Revenue Management: Hard-core Tactics for Market Domination’. RM systems forecast demand at different price points then optimise the number of seats sold at each price. They decide how many low-priced units to supply, when the supply should be opened or turned off. And they have an outsized impact on how much you pay.
If you’ve ever uttered a few choice words on discovering the holiday you just bought is a week later a fraction of what you paid for it, or searched for flights, changed your mind then gone back to find the price has risen, this is RM in action. When the system determines demand is increasing, it lowers the inventory of the least expensive options for customers, making the price shown higher. This worked well for the travel industry until recently.
RM balances two basic quantities of yield and load factor. Yield means the price paid per traveller. Load factor is a percentage, calculated as the number of travellers divided by the number of, say, seats on a flight. You can read more about the maths here. In periods of high demand, the supplier tries to maximise yield by reducing the cheap seats while, in the case of airlines, filling the plane. During low demand, the supplier offers more cheap seats to fill capacity. Load factor x Yield = the price obtained for the whole flight – this is what the supplier is trying to maximise.
Take an airline. It has fixed costs – aircraft, crew, maintenance and insurance – and variable costs. Most of an airline’s variable costs are related to flight, not the number of passengers. In practice, there is no difference in cost for an airline to carry 150 or 160 passengers. So incremental revenue from those extra ten passengers means almost pure profit. RM systems maximise the amount of revenue for the flight to maximise profitability.
Covid-19 disrupts
Traditional RM systems analyse patterns of historic demand for, say air travel, flights both recent and one to two years ago. They consider factors like how much each passenger paid in the past. At its core, RM forecasts the future based upon the past and sets the inventory accordingly. If you’re wondering, this is pretty similar for airlines, hotels, car rentals, cruise lines and almost any type of travel.
Historical consistency of demand meant RM systems could reliably forecast demand at different price points and optimise the number of units sold at each price. Pre-pandemic, RM was typically controlling 90 to 95% of flights without the need for human agency. Seasonally, a human would decide strategy, set the computer to implement that and press go. It was the equivalent of a ‘fire and forget’ weapons system on the battlefield. Often companies would not even replace experienced revenue managers.
Traditional RM systems created an unwavering belief in predicting demand based on how many travellers wished to travel in the past under similar time-frames and conditions. But in 2020 to 2022, the travel industry took an unprecedented hit with the abrupt curtailing of supply by government mandate. Now supply is returning, demand is manifesting in unexpected ways.
Traditionally, leisure travellers looked for the best price and business travellers the best schedule. In post-pandemic, inflationary times, with remote working more common, business travel has not, however, rebounded to previous levels. Business travel budgets have been cut and may never fully return. And passengers who were locked up for the best part of two years are now paying more to travel. Long-haul yields for leisure travel are c. 25% more expensive than pre-pandemic, while short-haul travel is less expensive. It means travel demand now adheres to a leisure, not a business schedule. Historical demand is no longer a valid basis for forecasting the future. The last year of ‘clean’ demand was 2019 yet the travel industry of 2023 looks fundamentally different.
RM systems interpret the difference between forecast and actual demand as variable demand when, in fact, the difference is because of poor forecasts. Travel pundits predict the industry will not recover until 2025. But they don’t really know because the industry-accepted approach to forecasting demand is no longer valid.
Opportunities
When demand is perceived as volatile, RM systems mostly react by making more low-priced seats (or hotel rooms etc) available. Revenue Management deplores empty seats. The problem? No-one knows when the cheap seats will be widely available – not even airlines.
Broken RM systems however provide great deals for travellers prepared to make the most of opportunities. It’s best to search often.
My company created JourneyHero technology as a solution. Once a traveller has searched and made a booking, we continue to search daily for a lower price for the same booking, or one of higher quality with a different supplier.
When a better deal is found, we make a provisional booking which the customer can then swap to, or refuse. We do not predict when the price will drop but keep checking to see if it does.
The travel industry has been slow to catch up with new technology, as seen by the collapse of global legacy travel systems or Southwest Airlines cancelling hundreds of peak flights because of a computer ‘glitch’. Shifting travel patterns are now the norm rather than the exception. Technologies which worked before are looking less fit for purpose. All this creates an opportunity for those who know how to make the most of the opportunities of a failing system paradigm.