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					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,
     tickets                                             Product                                                     Revenue              Sales and             Product           Loyalty and
                   Strategy            and fleet                             Scheduling          promotions,
                                                         design                                                     management           distribution           delivery             CRM
     Ancillary                         planning                                               and marketing

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

                                      Network                                                  Advertising,
     tickets                                             Product                                                    Revenue               Sales and             Product           Loyalty and
                   Strategy          and fleet                                                   promotions,
                                                          design            Scheduling                             management            distribution           delivery             CRM
     Ancillary                       planning                                                 and marketing

                 • 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

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

                                        Network                                                Advertising,
     tickets                                                 Product                                                 Revenue              Sales and          Product         Loyalty and
                     Strategy          and fleet                                                 promotions,
                                                              design          Scheduling                            management           distribution        delivery           CRM
     Ancillary                         planning                                               and marketing

                    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 and
  the CEO or COO. This team should routinely        

Oliver Wyman Journal                                                    Plugging the Leaks in Airlines’ Revenue Pipelines 53

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