Industry Focus: Aviation
Plugging the Leaks
in Airlines’
Revenue Pipelines
When times get tough, most airline executives
How Qatar and other instinctively start slashing costs. These moves
can substantially improve the bottom line,
airlines are gaining but they’re only half of the solution. True, the
typical revenue-enhancing strategies—raising
fares, offering more premium products, expand-
back 3-5 percentage ing networks—don’t seem appropriate when
demand slumps. As one senior executive recent-
points of revenue ly told us, “We’re too busy fighting for survival to
worry about revenue.”
within a year. We couldn’t disagree more. The revenue side of
the profitability equation holds large, but often
hidden benefits for virtually every carrier—even
in the worst downturns.
by Blair Pomeroy Revenue depends, of course, on many intercon-
nected and sequential activities, ranging from
Scot Hornick customer targeting and product design to rev-
enue management and frequent-flyer program
management. We call this collective set of activi-
ties, shown in Exhibit 1, the revenue pipeline in
order to emphasize the need to look at revenue
generation in a holistic way.
Our research shows that most airlines leak enor-
mous amounts of revenue through their pipe-
lines because of poor management of individual
sections within the pipeline or weak coordination
of sections across the pipeline. The impact of
these leaks can eclipse all possible cost savings.
In our experience, addressing the most obvi-
ous leaks can yield more than 3 to 5 percent-
age points of revenue (sometimes much more)
within a year—regardless of an airline’s size,
48 Plugging the Leaks in Airlines’ Revenue Pipelines Oliver Wyman Journal
Exhibit 1 The airline revenue pipeline
Revenue production within an airline
Passenger Advertising,
Network
tickets Product Revenue Sales and Product Loyalty and
Strategy and fleet Scheduling promotions,
design management distribution delivery CRM
Ancillary planning and marketing
Cargo
business model, or location—and even greater aged. Exhibit 2 highlights some common culprits
improvements over the longer term. behind leakage.
Why then do so many airline executives seem To illustrate how pervasive the problems can be,
to ignore these opportunities? Some don’t real- consider one section as an example: revenue
ize the magnitude of leakage from their revenue management, which includes both pricing and
pipelines. Others don’t know how to find and seat inventory management. Revenue manage-
plug leaks and recapture lost revenue, or they ment executives juggle changing demand, com-
fixate on just one or two leaks. petition, and capacity on a daily basis. Given the
complicated dynamics involved, this section har-
This article highlights some of the more com- bors many areas that can go awry.
mon and onerous types of leaks, both within
and across pipeline sections. We then suggest Start with pricing: A lack of fare integrity (i.e.,
broad strategies for plugging current leaks and fare classes muddied with products placed in
preventing new ones from springing up. the wrong “fare buckets”) is one pipeline bandit,
stealing from the front end of the revenue man-
Leakage Within Pipeline Sections agement section and limiting the effectiveness
Every section of the pipeline can leak revenue if of downstream revenue management activi-
the activities within that section are misman- ties. After all, how effective can the rest of rev-
Exhibit 2 Common leakage within a function
Passenger
Network Advertising,
tickets Product Revenue Sales and Product Loyalty and
Strategy and fleet promotions,
design Scheduling management distribution delivery CRM
Ancillary planning and marketing
Cargo
• Missing or • Poor hub/base • Under- or over- • Poor connectivity • Undifferentiated • Poor fare • Poor web site • Poor operational • Recognition
poorly selection and delivery on the for flow traffic product integrity functionality and performance on based on flown
understood structure customer value (for flow carriers) positioning conversion “the basics” volume rather
customer proposition • Poorly designed (on-time than contribution
strategy • Preference for • Timing flights for • Marketing fare families • Uncompelling performance, opportunity
new routes • Not managing home market messages not online ancillary baggage,
• Targeting of over proper “product” as but not linked to reality • Pricing by offering friendliness) , • Poor availability
too small or build-out of end-to-end outstations “gut feel” of redemption
impractical existing travel • Limited • Too much or too • Insufficient, seats
market markets experience • Schedule too search engine little use of irregular (undermines
segments tight for reliable optimization • Weak demand global distribution operation proposition)
• Overly • Innovation in execution and management systems management
forecasting and
fragmented “hard product“, of influential blogs inventory • Little or no
fleet/subfleet but inattention • Poor aircraft management • Weak agency and leverage of brand
to "soft product"
utilization corporate account into ancillary
management revenue
(sales force opportunities
effectiveness)
Oliver Wyman Journal Plugging the Leaks in Airlines’ Revenue Pipelines 49
enue management be if the organization cannot management forecasts. And most system ven-
assume that fares in a higher fare class are actual- dors don’t make forecast accuracy reporting a
ly more valuable than those in lower fare classes? standard feature.
Revenue can also leak out when fares are set Airlines with strong ancillary revenue sources,
based purely on gut feeling or “follow-the-leader” such as non-air travel or unbundled service
pricing logic, without analyzing market elastici- charges, can also leak revenue if they fail to
ties. Reaching clumsily for a “big price lever” to account for these margin streams (or distribu-
drive demand can leave half a point or more of tion costs) in the parameters they feed their
revenue on the table when compared to a more inventory management models. Careless man-
nuanced, analytical approach. agement of overbooking parameters and inac-
curate data capture of denied boardings and
Haphazard structuring of fare families can sap no-shows punch additional holes in the revenue
a little more revenue, leaving opportunities for management section of many airlines’ pipeline.
customers to circumvent fare rules. So can giving
the sales force too much or too little leeway to set Some of the clerical processes often spring their
prices. The relentless drive to hit sales targets can own leaks. Weak revenue integrity and flight-
turn even a disciplined sales force into pipeline firming practices can allow unethical agents to
renegades without proper oversight. covertly siphon off revenue. Poor waitlist man-
agement will divert revenue—and drive up Global
On the inventory management side, leaks often Distribution System (GDS) costs—by tying up seat
spring from poor demand forecast accuracy, as inventories on multiple segments, even when
surprisingly few airlines systematically measure there’s little chance of clearing the waitlist on the
and report on the accuracy of their inventory unavailable segments.
Leakage at a Major Latin American Carrier
Squeezed by aggressively expanding low-cost carri- well, the lack of fare integrity seriously undermined
ers (LCCs) and a rival network carrier at its primary the benefit. With fares assigned to the wrong
hub, a major Latin American carrier struggled with booking classes, the revenue management function
declining unit revenue. Shifting the revenue man- couldn’t be sure of the actual impact of its actions.
agement strategy from protecting yields to defend- The first step in plugging these two leaks was to
ing market share produced no discernible improve- re-file all fares into the proper classes, something ac-
ment in unit revenue. complished within three months. This laid the foun-
The carrier embarked on a revenue diagnostic dation for improvement in inventory management.
designed to identify quick wins and to prioritize po- A market review process, supported by new, forward-
tential longer-term initiatives. Applying a suite of di- looking reports, enabled the team to better under-
agnostic tools revealed two major leaks: sub-optimal stand market behavior and implement corresponding
inventory management and poor fare integrity. strategies via the revenue management system. These
The inventory management diagnostic uncovered two initiatives have delivered a 2% revenue improve-
strategies inconsistent with market realities. In mar- ment, overcoming any initial skepticism.
kets with late booking and high-yield demand, too Also coming out of the diagnostic was a longer-
many seats were made available to early-booking, term strategy enabling the airline to quantify,
low-yield passengers. In highly competitive markets, for each flight, the appropriate price premium or
discounted fare classes were being closed too early, discount needed to successfully compete with LCC
resulting in spoilage. The fare integrity diagnostic carriers. In test markets, this yielded as much as
revealed that, even where inventory was managed 3-4% improvement.
50 Plugging the Leaks in Airlines’ Revenue Pipelines Oliver Wyman Journal
These few examples of what can go wrong in they’re impractical. For example, one large airline
revenue management demonstrate the magni- spent considerable time defining over a dozen
tude of the opportunity. With so many places customer segments—which everyone in the
for leaks to spring up, it’s remarkable that any organization ignored. Meanwhile, executives of
revenue at all makes it through the pipeline. A low-fare carriers often dismiss customer target-
similar story of leakage woe can be recounted ing as counter to their “simpler is better” credo.
for virtually every revenue pipeline section. At the same time, many of them are trying to off-
set increasing market saturation by appealing to
Leakage Across the Pipeline more customer segments!
Revenue leakage across the pipeline occurs
when activities in two or more sections are Pipeline misalignments are all too common.
misaligned, as shown in Exhibit 3. This type of Many are so egregious that one wonders how
leakage is particularly problematic, because it carriers allowed them to develop in the first
is difficult to spot. place. Yet this type of leakage is particularly
difficult for executives to spot, as the revenue
Cross-pipeline leakage can often be traced to pipeline is notoriously complex. Even best-
poorly defined and communicated customer in-class carriers fall victim to misalignment
targeting (in the Strategy section of the revenue leakage. At Turkish Airlines, among the world’s
pipeline). Ideally, customer targeting should fastest-growing and most profitable carriers,
direct all other downstream activities within the Commercial Executive Vice-President Orhan
pipeline, beginning with the design of the air- Sivrikaya acknowledges that the airline is
line’s network and ending with customer-loyalty addressing misalignment between its increas-
management. When these activities come into ingly flow-oriented network and its leg-based
alignment, the airline reaches its intended cus- revenue management system.
tomers with the right products (network, fare,
channel, on-board experience, loyalty programs, Repairing and Preventing Leaks
etc.) at the right economics. Today, all airlines can count on having several
margin points of leakage in their revenue pipe-
Many large-network carriers spend a lot of line. Fortunately, executives can take steps to
money on customer targeting or segmentation. stop current leaks and prevent future ones.
Yet some targeting schemes are so complex that
Exhibit 3 Examples of common leakage across the pipeline
Passenger
Network Advertising,
tickets Product Revenue Sales and Product Loyalty and
Strategy and fleet promotions,
design Scheduling management distribution delivery CRM
Ancillary planning and marketing
Cargo
Premium passenger focus, but Large investments in on-board amenities while basic product
uncompetitive schedule due to delivery (on-time performance, baggage, staff courtesy) is weak
base structure
In-flight product over-designed (and overly expensive) for Well-designed fare families that can’t
primary customer segments (e.g., migrant labor traffic) be sold on the website
Premium passenger focus, but stingy on Inadequate staffing of call centers to support call volumes
product attributes generated by special promotion
Significant focus on business customers, but no fare products designed to appeal to them
Strategy that focuses on ancillary revenue opportunities with poor award availability and weak value proposition to potential co-branded card partners
Oliver Wyman Journal Plugging the Leaks in Airlines’ Revenue Pipelines 51
For virtually all carriers, current leakage is large It helps to know what to look for, and a set of
enough to justify moving quickly, particularly diagnostic aids can speed the effort, as shown
in the current economic environment. We rec- in Exhibit 4. The diagnostic exercise should
ommend a rapid cross-pipeline diagnostic to produce a list of initiatives ranked according to
identify quick wins and longer-term opportu- the magnitude of the associated benefit and the
nities. The quick wins will free up resources speed and ease of implementation. Maintaining
and solidify support for longer-term offen- the pace through the subsequent implementa-
sives. Certain pipeline sections (particularly tion phase will help to turn the quickly found
Scheduling, Revenue Management, and Sales opportunities into quick wins. This effort will
and Distribution) tend to present the best sourc- require a special commitment from a few of
es of quick wins, as the opportunities in these an airline’s top-tier commercial resources for
areas don’t require major realignments of the about a year. Don’t expect staff to retain other
airline’s asset base or IT infrastructure, and they full-time commitments and moonlight on the
raise little organizational angst. project.
Exhibit 4 Diagnostic aids
Diagnostic Explanation
Network, fleet, scheduling Assess revenue share gaps, schedule connectivity, aircraft configuration, and fleet assignment
Revenue management Identify lapses in fare integrity, systematic patterns of high-yield spill, spoilage, and overly aggressive or
conservative overbooking
Sales and channel management Analyze channel mix, costs, and conversion rates. Assess sales origin and destination budgets versus optimal
network traffic patterns in order to validate sales targets
Product delivery Identify inconsistencies between target customer strategy, product design, and product delivery
Loyalty program Analyze redemption displacement costs. Quantify loyalty partner P&Ls. Analyze customer segment P&Ls.
Cross-Pipeline Leakage at a Major European Flag Carrier
A European flag carrier considered exiting its long- local traffic and on minimizing distribution costs.
haul markets because it experienced disappointing The airline avoided filing behind-gateway interline
long-haul revenue performance, which worsened fares, having outsourced management of offline
coming into the current downturn. In response, the destinations to a few codeshare partners. Most of
airline launched a short, intensive diagnostic to de- the sizable offline demand had gone elsewhere.
termine where and how much revenue was leaking The desire to minimize distribution costs led the
from the long-haul pipeline. carrier to promote its own website, even at the ex-
The diagnostic showed that virtually all of the pipe- pense of other channels (such as corporate agents)
line sections were out of alignment. The misalign- that would, no doubt, drive higher-yielding, more
ment between Network and Fleet Planning and profitable demand. Not surprisingly, the airline
Sales and Distribution was causing the biggest leak. underperformed its peers badly in premium and
Many of the routes had thin local demand but gateway point-of-sale passengers.
were served with large-gauge equipment, a com- Analysis-based conclusions from the long-haul
bination that works only when multiple customer revenue pipeline diagnostic were helpful in coun-
segments are present and interline, codeshare, and tering those within the airline arguing for large
online flow are used to top-up demand. capacity cuts based on gut feelings. The carrier’s
Unfortunately, Sales and Distribution had been focus now is on bringing its revenue pipeline into
pursuing a different strategy, focused primarily on alignment.
52 Plugging the Leaks in Airlines’ Revenue Pipelines Oliver Wyman Journal
Plugging Leaks at Qatar Airways
By 2006, Qatar Airways had grown from regional rier introduced a new booking engine; launched
flier to global network carrier. Its top-line rev- e-ticketing; dramatically expanded fare filings; ad-
enue growth and five-star rating by Skytrax were justed commission levels throughout the network;
impressive. Still, Qatar’s CEO, Akbar Al Baker, and renegotiated GDS and hosting contracts. In
believed his airline was leaking large amounts Product Delivery, it redesigned its on-time perfor-
of revenue. A series of short diagnostic exercises mance processes, while in Loyalty and Customer
confirmed his hunches. Relationship Management Qatar relaunched the
Privilege Club frequent flyer program. Finally, in
Over the next two years, the airline embarked Cargo Revenue Management and Sales and Distri-
on a broad performance-improvement effort in bution the airline introduced new pricing struc-
virtually every section of its pipeline. In Network, tures; redesigned core pricing, space allocation,
Fleet Planning, and Scheduling, Qatar restructured and booking acceptance processes; and launched
its Doha hub, modified cabin configuration, and new sales force effectiveness processes.
increased aircraft utilization. In Revenue Manage-
ment, it redesigned core processes such as waitlist These changes were neither cheap nor easy, but
management; realigned booking classes; formal- the results clearly justified the effort. Because
ized pricing policies and established branded quick wins were front-loaded, revenue gains
fare products; improved demand forecasting; became apparent within a few months. By the end
introduced a new revenue integrity system; and of the first year, Qatar’s unit revenue was surging,
deployed a world-class O&D Revenue Manage- even as capacity growth stayed above 30%—a feat
ment system. In Sales and Distribution, the car- rarely achieved anywhere else.
New cracks will eventually form in the pipe- produce and analyze pipeline performance
line unless airlines effect a few foundational reports, serve as coaches and champions of
changes: pipeline integrity, and rove across the pipeline
fixing leaky sections and correcting cross-
Develop a unified customer-targeting strategy. section misalignments.
The strategy must have an analytical basis,
but must also be practical and communicat- * * *
ed clearly and frequently across the
organization. Many airline executives reading this article may
believe that their airline isn’t leaking much
Establish a pipeline-performance-measurement sys- (or any) revenue. To these skeptics, we suggest
tem. This should track key metrics within indi- conducting a small pipeline diagnostic anyway.
vidual sections and across the pipeline. Assign your best commercial staff for just three
months to this project, and see what happens.
Manage the pipeline as an integrated flow of reve- The opportunity to match, or even surpass, the
nue-producing activities, not a collection of function- bottom-line impact of cost-saving initiatives you
al silos. Some airlines may choose to appoint a have contemplated is well worth this manage-
chief revenue officer, who sits atop the pipe- able investment.
line and ensures that all functions operate in a
Blair Pomeroy is a Zurich-based partner and Scot Hornick is
coordinated and efficient fashion. Others may
a Chicago-based partner of Oliver Wyman. They can be
prefer a cross-functional team that reports to reached at blair.pomeroy@oliverwyman.com and
the CEO or COO. This team should routinely scot.hornick@oliverwyman.com.
Oliver Wyman Journal Plugging the Leaks in Airlines’ Revenue Pipelines 53