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					                                                                  Journal of Revenue and Pricing Management        Volume 1 Number 1




RESEARCH PAPERS

Expanding the revenue management frontier:
Optimal air planning in the cruise industry
Warren H. Lieberman and Tamara Dieck
Received (in revised form): 28th November, 2001

Veritec Solutions, 285 Hamilton Avenue, Suite 325, Palo Alto, CA 94301, USA
Tel: +1 650 833 5990, Fax: +1 650 853 7258; E-mail: warren@veritecsolutions.com,
tamara@veritecsolutions.com



Warren Lieberman is recognised as one of           with emphasis on decision support for routing
the world’s leaders in non-traditional             passengers on flights and negotiating contract
implementations of revenue management              fares with the airlines. Benefits of such a pro-
and has been working with cruise lines for         gramme include improving both customer service
the past 10 years to enhance their profit-          and relationships with airlines and reducing air-
ability.                                           fare expenses by 5–8 per cent.
Tamara Dieck specialises in the applica-
                                                   INTRODUCTION
tion of management science and statistical
                                                   Revenue management. Pricing. What pic-
tools to design customised pricing and
                                                   ture does that bring to mind? A common
revenue management solutions. Dr Lieber-
                                                   initial reaction is to think about innovative
man and Ms Dieck both work for Veritec
                                                   approaches for selling a product to a com-
Solutions. Veritec is a consulting firm
                                                   pany’s customers. Now think about the
based in Palo Alto, CA, whose services
                                                   conditions necessary to apply revenue man-
include systems development, educational
                                                   agement concepts. One of the core requi-
workshops, strategic consulting, and
                                                   sites often cited is the presence of high
implementation support.
                                                   fixed costs and low variable costs with pro-
ABSTRACT                                           duct sales (Cross and Lieberman, 1991;
KEYWORDS: revenue management, air                  Kimes, 1997; Shuman, 1991). And it is true
planning, minimum cost network flow                 that traditional applications of revenue
model, cruise-line industry, negotiating           management tend to have this feature.
contract fares                                        This paper contends that for some indus-
                                                   tries there is another side of revenue man-
Applications of revenue management usually         agement, one that has received much less
focus on the sale of products to customers. This   attention. In industries where product sales
paper shows how revenue management can also        involve high but manageable variable
be applied to a company’s purchase of services.    costs, revenue management opportunities
We focus on the cruise-line industry, where the    may exist with respect to the company’s
purchase of airfare for cruise passengers can      purchase of goods or services. One such             Journal of Revenue and Pricing
                                                                                                       Management, Vol. 1, No. 1, 2002,
exceed 20 per cent of revenues. An outline for     industry, the focus of this paper, is the           pp. 7–24
                                                                                                       # Henry Stewart Publications,
an optimal air planning programme is proposed,     cruise industry, where 20–25 per cent of a          1476–6930




                                                                                                                                    Page 7
Expanding the revenue management frontier




                              cruise line’s revenue may go towards the       cannot easily vary the level of shipboard
                              purchase of airfare for its customers.         staff from cruise to cruise.
                                 At first glance, the inclusion of this          Passengers typically book cruises any-
                              paper in the Journal of Revenue and Pricing    where from one year to only a few days
                              Management might seem out of place. The        prior to their trip (Dickinson and Vladimir,
                              decision support tools and modelling           1997). For holiday and more exotic cruises,
                              approach presented here are quite different     bookings may even occur 18–24 months in
                              from those found in more traditional rev-      advance. Throughout this long booking
                              enue management applications. On more          period, the cruise line may use a variety of
                              careful reflection, however, the techniques     inducements to stimulate demand. These
                              presented here will be seen to address a       include cabin level upgrades, 50 per cent
                              problem similar to the traditional revenue     reduction for the second passenger, and
                              management problem: to maximise net            regional promotions that include airfare for
                              revenue by controlling the use or sale of      specific cabin categories on certain sailing
                              available inventory in the face of uncertain   dates.
                              demand. Techniques for directing demand           A cruise booking may be termed an air/
                              in a manner that increases profits and          sea booking if it includes roundtrip airfare
                              leveraging supply and demand forecasts to      or a cruise only booking if airfare is not
                              affect pricing decisions are at the heart of    included. Air/sea packages are marketed
                              the air planning challenge discussed in this   and sold in a variety of ways by the cruise
                              paper. And, to a large extent, this is fun-    lines, but the cost of airfare to the cruise
                              damentally what more conventional rev-         line is rarely, if ever, an exact pass through
                              enue management applications are also          to the customer. To do so would require
                              about.                                         an incredibly complex and problematic
                                                                             pricing structure. The price of an air/sea
                              THE OPPORTUNITY                                booking (cabin plus airfare plus other inci-
                              The primary goal of revenue management         dental fees) is generally communicated to
                              in the cruise-line industry is to maximise     potential cruise passengers in advance of a
                              the net revenue received by the cruise line    booking (eg through cruise-line brochures
                              from the sale of cabins on each sailing. A     or advertisements in a newspaper) or at the
                              cruise ship may have a dozen or more           time of booking. The actual air cost that
                              cabin categories, each with its own price      the cruise line will incur for transporting
                              point. Unlike many other industries,           the passenger, however, is not determined
                              cruise-line revenue management often has       until later.
                              a secondary objective of ensuring high load       Cruise lines typically negotiate contract
                              factors — for operational reasons, it may      airfares with each carrier on a city by city
                              be important to sail with occupied cabins.     basis. Negotiated airfares vary by carrier.
                              For example, at some cruise lines many of      Consequently, the cost incurred by the
                              the staff working aboard ship may depend        cruise line for transporting a passenger by
                              on gratuities for much of their income.        air depends on the airline that the cruise
                              Cruise lines that do not consistently sail     line books for the passenger. Negotiated
                              with high load factors may have greater        fares typically include a base fare for each
                              difficulty in retaining their shipboard staff.    market. Airlines may also provide the
                              Unlike other industries, such as hotels,       cruise line with a set of higher bump-up
                              where the levels of housekeeping and           fares if the base fare or lower bump-up
                              front-desk staff might be adjusted based on     fares are not available owing to inventory
                              forecast occupancy levels, cruise lines        control restrictions implemented by the




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                                                                                                   Lieberman and Dieck




airline’s revenue management department.         sequently, decisions made by the air plan-
The bump-up fares would typically be             ning department can have a material
relevant when the cruise line books more         impact on the net profitability of a cruise,
passengers on a flight than its allotted seat     as its efforts affect the magnitude of passen-
block.                                           ger variable costs incurred by the cruise
   The assignment of cruise passengers to        line.
flights usually occurs well after reservations       A cruise line’s air planning function
are made and the total cruise and air price      typically consists of several elements:
has been communicated to the customer.
In part, this is because cruises are not typi-   — negotiating guaranteed access to airline
cally paid for at the time they are booked.        seats for transporting some cruise
Passengers may have a week after they              passengers to and from cruise ships
make a reservation to make a refundable            (cruise lines may obtain seat block allo-
deposit. If the deposit is not received, the       cations from airlines on some routes);
reservation may be automatically cancelled.      — negotiating contract fares with airlines
Depending on the type of cruise, final pay-         for each route;
ment may not be due until 45, 60 or 90           — identifying opportunities to schedule
days prior to the cruise. Cruise lines will        charter flights, when sufficient space on
generally not book flights for passengers           regularly scheduled flights might not be
until they receive a deposit, and may only         available;
begin booking flights nine months or less         — managing airline seat inventory in the
before the sailing. Given the range of con-        optimal manner, including identifying
tract fares that a cruise line may negotiate       the best flights on which cruise passen-
in a market, as well as the occasional need        gers should be flown, considering both
to pay a bump-up fare rather than a base           cost and customer service factors;
fare, the costs of alternative flights might      — communicating with sales, marketing
change the profit margin of an air/sea              and revenue management departments
booking by as much as 5–10 per cent, and           when the availability of seats or cost of
sometimes more.                                    transporting passengers from a gateway
   A cruise line’s revenue management              city for a cruise might affect pricing or
department will typically have responsibil-        inventory control decisions;
ity for setting the prices of a cruise and for   — problem investigation and resolution
determining the types of promotions to             regarding past and upcoming air plan-
run for a cruise. Revenue management               ning decisions.
staff also set inventory controls on promo-
tions, determining promotion eligibility         Cruise lines are finding that airline seats are
and how many should be sold. For exam-           becoming increasingly more difficult to
ple, a lower price might be offered for air/      come by, especially for some holidays and
sea passengers flying from Detroit and Cin-       other popular sailing dates. This problem is
cinnati, but not from Chicago. Or a two-         getting worse, since cruise-line capacity is
cabin upgrade might be offered to cruise-         increasing faster than airline lift. Indeed, in
only passengers who book a level-8 cabin.        many markets, airline capacity has been
The revenue management department gen-           stable or decreasing, while cruise demand
erally does not have responsibility for          grows. Negotiating for additional airline
making the flight arrangements for air/sea        seats has become a true art and builds on
passengers. This is the responsibility of the    long-established relationships at some
cruise line’s air planning department. Con-      major cruise lines.




                                                                                                               Page 9
Expanding the revenue management frontier




                                 Therefore, active management of air            It is hoped that focusing on these two ele-
                              costs provides a major opportunity for cost       ments will illustrate how both advanced
                              reduction,     and     consequently      profit    operations research techniques as well as
                              enhancement, for many cruise lines (Lie-          relatively simple quantitative modelling
                              berman et al., 1993). To the extent that a        made possible by a revenue management
                              cruise line can ‘assign’ its passengers to less   perspective can prove insightful and lead to
                              costly flights, while still meeting the cruise     increased profits.
                              line’s customer service policies, cruise lines       Just as revenue management is not a des-
                              obtain a dollar-for-dollar improvement in         tination, but a journey, so too is optimal
                              profits. And to the extent that a cruise line      air planning. Consequently, the question
                              improves its relationship with an airline         cruise line air planning departments should
                              and can leverage this improved relationship       be asking is not, ‘Have we addressed each
                              into negotiating lower contract fares in          of these six areas?’ but rather, ‘What could
                              some gateway cities, its costs are further        we do better in each area?’ ‘How?’ and
                              decreased.                                        ‘What would this be worth?’
                                 At many cruise lines, relatively low              As each item is discussed below, it is
                              investments in decision support tools were        important to recognise that changes to the
                              made in air planning departments until the        way in which business is carried out by an
                              past few years. These departments tended          air planning department may also lead to
                              to be thought of as cost centres, rather than     increased benefits. Such opportunities are
                              as strategic areas where better decisions         not discussed in this paper, except to note
                              could lead to dramatic improvements in            that some air planning departments are not
                              cruise-line profitability. This has finally         alerted to potential problems or opportu-
                              begun to change.                                  nities for managing their air expenses more
                                 Just as many travel companies and some         effectively because they lack the automated
                              cruise lines have discovered the benefits of       tools that facilitate this.
                              a coordinated and comprehensive revenue
                              management programme, similar benefits             AIR PLANNING DATABASE
                              can be obtained from an optimal air plan-         The database is at the core of the optimal
                              ning programme. An optimal air planning           air planning programme. It should pull
                              programme consists of six primary ele-            relevant financial and operational data into
                              ments:                                            one location for easy access, analysis and
                                                                                manipulation. For maximum effectiveness,
                              (1) air planning database;
                                                                                the database will include data feeds from
                              (2) highly active and responsive interde-
                                                                                the cruise line’s reservation system, an air-
                                  partmental communications;
                                                                                line CRS, the cruise line’s back-office
                              (3) route-optimisation decision support;
                                                                                system, as well as flight schedule and con-
                              (4) block space and charter flight planning
                                                                                tract fare data. More specifically, the data-
                                  and acquisition decision support;
                                                                                base would include ship and inventory
                              (5) contract fare negotiation support;
                                                                                specifications, sailing itineraries, reservation
                              (6) reporting and performance measure-
                                                                                details (such as booking date, sailing, pay-
                                  ment system.
                                                                                ment status, gateway city), group booking
                              A complete air planning solution includes         details, airline contracts’ base fares and
                              each of these six elements, and each ele-         bump-up fares, airline schedule data, block
                              ment is touched on in this paper. The             space held or requested, purchased charters,
                              focus, however, is on the route optimisa-         airline routing assignments and their status,
                              tion and contract fare negotiation elements.      air costs, etc. A comprehensive air planning




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                                                                                                Lieberman and Dieck




database might easily contain 40–50 giga-       cruise-with-air passengers should be
bytes of data.                                  launched.
                                                   To help accomplish this, some cruise
COMMUNICATION                                   lines have reorganised reporting relation-
Equipped with a comprehensive optimal           ships so that the director of revenue man-
air planning programme, the air planning        agement and the director of air planning
department can communicate with other           report to the same vice president.
departments more effectively and effi-
ciently. Standard reports will alert senior     ROUTE OPTIMISATION
management to unexpected (favourable            As previously noted, passengers are typi-
and unfavourable) air cost trends and           cally assigned to flights after their reserva-
potential gateway city problems. Air plan-      tions have been accepted and the price for
ning staff can quickly perform ad hoc ana-       the cruise and airfare agreed. Some cruise
lyses to answer questions from other            lines have adopted procedures that assign
departments.                                    passengers to flights on the lowest contract
   While the development of the system          fare carrier in that gateway city. When
components is certainly important, the          space is no longer available on that carrier,
organisational considerations and processes     passengers are then assigned to flights on
required to develop active and responsive       the carrier with the next lowest contract
communications are no less critical (Lough      fare, and so on. Some of the cruise-line
and Pastor, 1999). Once the air planning        staff spoken to believe that this will typi-
database and reporting systems are in place,    cally lead to the least-cost routing of pas-
potential barriers to the open communica-       sengers. And that would be the least-cost
tion of this information across the organisa-   way to assign passengers to flights, if the
tion should be reduced, if not eliminated.      assignment of passengers in one gateway
Air planning staff should work closely to        city did not affect the assignment of passen-
provide needed information to cruise staff       gers in another gateway city.
in marketing, revenue management, inven-           Unfortunately, the assignment of passen-
tory control and other departments.             gers to flights in one city can, and often
   For example, if the marketing depart-        does, affect the assignment of passengers in
ment needs average airfare costs for the top    another city. Many passengers are not
50 gateways in the last quarter, air plan-      routed on non-stop flights, but are routed
ning staff can quickly produce such a            through airline hub cities. Cruise lines are
report and provide the data in tabular and      often limited in the total number of passen-
graphical formats. Alternatively, a market-     gers that can be routed through a hub on a
ing analyst could have access to the optimal    specific airline. If all the passengers from
air planning system, and easily obtain the      Tulsa to Miami are routed on American
report him/herself. Air planning staff can       Airlines flights through Dallas, this might
provide the marketing department with           require some Dallas-based passengers to be
up-to-date information at the sailing date      routed on Delta; or it could require some
level on current air costs, problem gate-       Austin-based passengers to be routed on
ways and gateways where significant addi-        Continental through Houston rather than
tional lift may be available. Marketing staff    on American Airlines through Dallas.
can use this information to help identify
sailings and gateways where promotions          Routing example
should be made available to cruise-only         The following example demonstrates how
passengers and where promotions to              this can lead to increased costs for the




                                                                                                           Page 11
Expanding the revenue management frontier




                              Table 1: Alternative Tulsa and Austin routings

                                                                          Leg 1                    Leg 2

                              Route    Routing (Leg 1/Leg 2)              Flight No.   Capacity    Flight No. Capacity Fare ($)
                              ID

                              1        Tulsa–Dallas/Dallas–Miami          180          25          555        20        210
                              2        Tulsa–Atlanta/Atlanta–Miami        200          25          244        25        230
                              3        Austin–Dallas/Dallas–Miami         311          25          555        20        200
                              4        Austin–Houston/Houston–Miami       455          20          883        30        250



                              cruise line. Assume that there are 20 pas-          straints (eg connection times should not be
                              sengers that need to be routed from Tulsa           greater than 90 minutes) can also be speci-
                              to Miami and 15 that need to be routed              fied and factored into the routing decision.
                              from Austin to Miami. There are two                 It is even possible to include automated
                              routes available from Tulsa and two from            decision supports for identifying opportu-
                              Austin. Table 1 defines the routes and               nities to use charter flights to reduce airfare
                              fares. The leg or segment flight numbers             expenses. In our experience, such routing
                              are given, as are the leg capacities. The           optimisation models might decrease a
                              capacity numbers given are the number of            cruise line’s annual airfare expenses by 5–8
                              seats available to the cruise line.                 per cent. For a cruise line with revenues of
                                 The lowest cost feasible routing of the          $1bn, this could translate into an annual
                              35 passengers is obtained by placing five            profit increase of perhaps $10–20m.
                              Tulsa passengers on Route 1, 15 Tulsa pas-
                              sengers on Route 2, and all 15 Austin pas-          Routing model
                              sengers on Route 3. This results in an              The routing problem is thus to route the
                              airfare cost of $7,500. Note that if all the        cruise line air/sea passengers from numer-
                              Tulsa passengers are first routed on the             ous gateways to (and from) their port
                              cheapest available routing (Route 1), then          cities. Each passenger desires the best
                              the Austin passengers must be routed on             flights, and the cruise line will have prefer-
                              Route 4 (because of the limited capacity            ences with respect to the service level pro-
                              on Flight 555 of 20 passengers). This alter-        vided to its air/sea passengers. There are a
                              native routing results in a total airfare cost      limited number of seats, however, on each
                              of $7,950, a 6 per cent increase. While             routing.
                              simple to calculate for just two gateway               Since passengers often travel together
                              cities and one port, optimizing over 50,            on a cruise, we actually need to route all
                              100 or 150 gateway cities and multiple              of these ‘travel-with’ groups. These travel-
                              ports is not an easy task.                          with groups can range in size from two
                                 It is possible to capture such cost savings      people to groups of more than 50. In the
                              with a network optimisation routing                 case of larger groups, where the cruise
                              model. In such models, passenger demand             line may not have enough space on a
                              from all gateway cities is considered simul-        single flight to route the entire travel-with
                              taneously, rather than sequentially. The            group together, the group is split up
                              least-cost routing considering all passengers       based on a user-defined maximum
                              is then determined. Customer service con-           number of routings.




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                                                                                                         Lieberman and Dieck




   Customer service constraints, such as a        problem. The objective is to minimise the
preference for non-stop over connection           total cost of routing all travel-with groups
flights, are handled through adjustments to        for a given embarkation date.
the flight costs. For example, if a cruise line       Let
is willing to pay $20 more to place passen-
gers on non-stop flights, the connecting           Xjkt=    number of passengers sent on
flights might be penalised by that amount.                  route j, in class of service k, from
So if non-stop Flight A is $250 and connec-                travel-with group t
tion Flight B-C is $240, the model might          Yjt=     1 if travel-with t is on route j
use an adjusted cost for Flight B-C of                     0 otherwise
$260, making Flight A the preferred rout-         Cjk=     adjusted cost of one passenger on
ing. Similar adjustments can be made to                    route j, in class of service k
flights based on flight times, jet vs propeller     Paxt= number of passengers in travel-
flights, and many other service constraints                 with group t
that the cruise line wants to consider.           Splitt= number of flights travel-with
These adjustments can be carried out in a                  group t can be put on (>1 for
data pre-processor to the model that allows                large groups)
users some leeway in defining how to con-          Flightik=capacity on flight i, in class of
sider and value interactions of multiple cus-              service k available to cruise line
tomer service factors.                            Zij=     1 if flight i is in route j
   When cruise lines negotiate contract air-               0 otherwise
fares, there is the possibility that the fare     Routejk=minimum seat capacity over all
negotiated with an airline will be lower                   flights i in route j for class of
than otherwise possible, if the cruise line                service k (eg if Flight 111 from
agrees to meet certain market share com-                   City A to City B coach capacity
mitments (Anonymous, 1991; Schellenber-                    is 35 and Flight 222 from City B
ger, 1991). That is, the cruise line agrees to             to City C coach capacity is 45,
use that airline for at least a certain percen-            then the route capacity is
tage of its passengers from a gateway city.                min[35,45]=35)
The model treats this particular constraint       Sharem= market share commitment made
explicitly, where the market share values                  with a specific carrier for a given
are user defined. In practice, cruise staff                  origin-destination
would monitor the cruise line’s market            Wmj= 1 if Sharem applies to route j
share performance over the course of the                   0 otherwise
year and use this information to adjust           Vj =     1 if route j is for the origin-desti-
market share constraints for particular                    nation of Sharem
cruise departure dates. There would gener-                 0 otherwise
ally not be a need to honour market share
commitments on a weekly basis; rather
cruise staff could carry out some sensitivity      Then the model is
analysis to estimate the financial impacts of                           X           X
meeting market share commitments for                             min         Yjt       Cjk Xjkt
                                                                       t;j         k
any given run of the model and based on
that information determine the most               subject to:
appropriate way to proceed.                               X
   A minimum cost network flow model is                           Xjkt ¼ Paxt for t ¼ 1; 2; : : :   ð1Þ
formulated to solve the least-cost routing                 j;k




                                                                                                                    Page 13
Expanding the revenue management frontier




                                       X
                                                 Yjt  Splitt for t ¼ 1; 2; : : :    ð2Þ       The fourth constraint makes sure that the
                                         j                                                     route capacity is not exceeded. The fifth
                                       X                                                       constraint ensures that each market share
                                                Xjkt Zij  Flightik for all i; k     ð3Þ       commitment is met.
                                        t;j

                                X                                                              Experimental results
                                     Xjkt  Routejk for all ðj;kÞin the network ð4Þ            To estimate the value of the route optimisa-
                                 t
                                                                                               tion model, a prototype was developed. A
                                         P                                                     simplified network of gateway cities that
                                               Xjkt Wmj
                                         j;k;t                                                 concentrated on routings from the north-
                                              P          Sharem for all m           ð5Þ
                                                Xjkt Vj                                        east USA to Miami was created. The goal
                                              j;k;t                                            was to see how the model would have
                                                                                               routed passengers on departed cruises and
                              The first constraint ensures that each travel-                    then compare the airfare cost resulting from
                              with group gets routed. The second con-                          those routing decisions to the cost actually
                              straint identifies the maximum number of                          incurred by the cruise line. The network
                              flights over which a travel-with group can                        included 22 north-east gateways for routing
                              be routed. The third constraint makes sure                       passengers from the New York area to
                              that for every flight that appears in more                        Miami. (Figure 1 illustrates this New York
                              than one route, the number of passengers                         network of gateways.) The model itself was
                              routed on that flight will be less than or                        simplified in that no travel-with or market
                              equal to the given capacity on that flight.                       share constraints were considered.


                              Figure 1: Reduced air cost estimate: The ‘Newark Network’

                                                                                                                                 BGR

                                                                                                                          PWM
                                                                                                           SYR
                                                                                      BUF      ROC               ALB   MHT
                                                                                                                               ORH
                                                                                                                                  BOS
                                                                                                                   BDL
                                                                                                                                PVD

                                                                                                            EWR          JFK
                                                              CLE                             BWI    PHL
                                                                               PIT

                                     CVG

                                                                                           GSO
                                                                               CLT
                                                      ATL




                                                                                  TPA
                                                                           (Route from BDL)
                                                                                                    MIA




Page 14
                                                                                                            Lieberman and Dieck




  Actual routing options for the selected       Scenario 2 was thought to be the most rea-
gateways were chosen based on the follow-       listic, in terms of the number of seats the
ing conservative assumptions:                   cruise line could actually expect to pur-
                                                chase on a flight.
(1) Double connections were not allowed.            Historical passenger counts were
(2) Routes into Ft Lauderdale (half an hour     obtained for eight sailings. For these sail-
    from Miami) were not included.              ings, the airlines’ contract fares in each
(3) Connecting passengers could only be         gateway city and the flights on which pas-
    routed on the next flight to Miami (ie       sengers were actually routed were known.
    waiting for a later connecting flight        It was possible to compare the costs of the
    was not permitted).                         actual routings with the costs of the rout-
                                                ings recommended by the model. For two
These assumptions helped to ensure that         sailings, the seat availability was too highly
running the prototype would yield a con-        constrained by the third scenario and feasi-
servative estimate of its potential value. In   ble solutions were not found. This finding
practice, these assumptions could be            was consistent with the expectation that
relaxed under certain conditions, and addi-     Scenario 2 was most realistic, as Scenario 3
tional routing options would be incorpo-        underestimated the number of seats the
rated into the model. The routing model         cruise line was able to obtain. For the
might identify even less costly flights on       tested scenarios and sailings, the potential
which to route passengers.                      air cost savings ranged from 3 per cent to
   For the selected routes, three scenarios     16 per cent per sailing, reaching as high as
were run, varying the capacity limits on the    11.6 per cent when only Scenarios 2 and 3
number of passengers the model could            are considered. Table 2 contains the esti-
assign to any flight. Although it was known      mated benefits for the eight sailings under
how many passengers were routed by the          each scenario. Based on the results of the
cruise line on each flight, access was not       prototype, a conservative estimation is that
available to the maximum number of pas-         the routing model could help a cruise line
sengers that could have been routed on any      reduce its air costs by 5–8 per cent.
of these flights. The scenarios were selected
to help evaluate the impacts of acquiring
more space than the cruise line thought it
could easily obtain, the amount of space that
the cruise line usually did obtain, and less    Table 2: Benefits estimate: Reduced air
space than was usually obtained. These three    costs (%) — New York Network
scenarios, respectively, were
                                                Voyage        Scenario 1       Scenario 2      Scenario 3
Scenario 1. Assume availability is equal to                                                    a
            route capacity (ie assume the       1             11.7              7.1
                                                2             12.6              9.6            3.0
            cruise line could obtain all
                                                3             10.9              8.8            4.1
            seats on the selected flight).       4             16.5             11.6            a
Scenario 2. Assume availability is equal to     5              7.7              6.5            4.5
            30 per cent of the route capa-      6              9.5              9.3            7.7
            city.                               7             12.2             10.1            6.5
Scenario 3. Assume availability is equal to     8             12.3             10.8            6.5
            the minimum of 20 seats or 25
                                                a
            per cent of the route capacity.         Seat availability too highly constrained




                                                                                                                       Page 15
Expanding the revenue management frontier




                              Implementation                                    tain gateway cities might lead to a signifi-
                              As described in this section, there are many      cant increase in the airfares paid by the
                              ways such a routing model can be used to          cruise line. Users can run several ‘what if?’
                              provide benefits. Taking advantage of              scenarios and get a sense for how much the
                              these opportunities might require changes         optimal solution changes, given various
                              to the responsibilities of air planning staff.     demand values from each gateway. Such
                              In some cases, significant changes might be        information might be communicated to
                              required to how business is carried out.          revenue management and influence where
                              While such changes might not require a            promotional air/sea rates are offered.
                              large business process re-engineering effort,         As additional reservations for the cruise
                              the ‘what is possible’ discussion should be       are made and additional passengers are
                              to tempered with the reality that successful      routed on flights, the model also has the
                              implementation of a model requires paying         potential to provide cruise-line staff with
                              attention to the environment in which it is       an improved ability to evaluate when
                              implemented.                                      rebooking flights is cost effective. As dis-
                                  As passengers book their cruises, cruise      cussed earlier, this can happen when a pre-
                              lines face a decision of when to book flights      viously executed flight booking forces a
                              for those passengers who need them. By            subsequent booking to be on a more
                              starting to book flights earlier, cruise lines     expensive airline owing to seat limitations.
                              are more likely to obtain base fares rather       Using the routing model in combination
                              than the higher bump-up fares. The ‘cost’ of      with a post-processor model, the cost of
                              doing this, however, is that passengers may       rebooking flights for passengers could be
                              ultimately cancel their reservation and if        evaluated. As cruise passengers may not be
                              they do, the cruise line will have incurred       informed about the flights on which they
                              unnecessary costs, both labour and possibly       have been booked until 30 days prior to
                              booking/cancellation fees due to the Global       their departure, there is often a window of
                              Distribution System (GDS) provider. In            opportunity for rebooking flights before
                              addition, booking flights before the full          the cruise line communicates with their
                              demand for a cruise is revealed decreases the     passengers about their flights.
                              likelihood that all passengers will be assigned      The routing model also facilitates two
                              to flights that yield a global optimum solu-       other types of useful analyses. First, it pro-
                              tion. Cruise lines have adopted different          vides the cruise line with a systematic abil-
                              procedures for addressing this situation, but     ity to evaluate the financial and customer
                              as far as we know there has been little or no     service impacts of alternative service poli-
                              systematic analysis to evaluate the cost          cies. For example, if the cruise line is will-
                              implications of alternative policies on when      ing to pay $20 more for non-stop flights
                              it is best to begin booking flights.               on routes that exceed 1,500 miles, how
                                  The potential costs of these trade-offs        much does this policy cost the cruise line?
                              have not yet been evaluated, but the rout-        Information is also readily available to esti-
                              ing model provides a strong foundation for        mate how many passengers benefit from
                              doing so. In practice, the routing model is       this policy and the amount of time they
                              likely to be run multiple times for a cruise      save. Cruise staff can then make more
                              departure. It is also possible to run the         intelligent decisions on whether or not
                              model with a forecast of final demand in           such policies should be maintained,
                              combination with current bookings. Doing          expanded or constricted.
                              so could help air planning staff understand           A second benefit of the model is opera-
                              better how additional bookings from cer-          tional in nature. Cruise lines can find it




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                                                                                                     Lieberman and Dieck




necessary to assign their staff responsibility       provides is the ability to determine easily
for routing the passengers for a specific            where airline space is getting tight.
ship. So, if the cruise line has two depar-         Although cruise lines work at not being
tures out of Miami on a Saturday, the pas-          surprised by difficult air bookings, during
sengers for each sailing, as well as                their work with cruise lines the authors
management of the airline space, may be             have become aware of many instances
separated into two sub-problems that are            where flight costs for some passengers
treated, to a large extent, independently of        were surprisingly high, and this was not
each other. Such operational decisions are          recognised until it was too late to take any
likely to increase the airline expenses             remedial action. As might be expected,
incurred by the cruise line. We have                cruise lines’ procedures tend to focus on
observed instances where decisions of how           facilitating the sale of cabins; communicat-
to allocate block space among multiple sail-        ing that certain factors may reduce the
ings results in inefficient use of the total air-     profitability of a sale, such as an expensive
line space available to the cruise line for its     airfare, has not received the same level of
passengers. The routing model reduces the           attention. Availability for air/sea bookings
need for these artificial divisions of space         may be shut down for a gateway city
and facilitates the cruise line’s ability to        when air planning staff realise that they do
manage the entire routing problem.                  not have access to additional seats, but staff
    For sailings where the cruise line has          may not proactively investigate this for all
arranged for charter airline service to supple-     the gateway cities for every sailing. And
ment regularly scheduled flights, the model          even if they did, given the lag time
facilitates the cruise line’s ability to deter-     between booking and when flights are
mine which passengers should be routed on           reserved, flight availability and fares may
the charter flight. When a cruise line con-          undergo significant change. This is quite
tracts for a charter flight, there is a strong       different from tour operators who first
financial incentive for the cruise line to fly as     obtain specific allocations of inventory
many passengers as possible on the charter.         from various travel suppliers and then
The cost of the charter to the cruise line has a    only sell vacation packages when they
high fixed cost component but will not vary          know they have access to each component
much, if at all, based on the number of pas-        of the package and the price at which they
sengers. For passengers originating in the          can obtain each component.
same gateway city as the charter, there is             In one instance, a group requested air/sea
little or no variable air cost to the cruise line   fares from a gateway city with limited air-
when these passengers are routed on the             line service. No information was available
charter flight. For passengers connecting to         to the reservations agent on the number of
the charter, the cruise line’s incremental          air/sea fares that could be sold from the
variable cost would be the cost of routing          gateway city; the only available informa-
the passenger from the gateway city to the          tion was that sales could be made. The
charter origination city. By including viable       group reservation request was accepted
charter flight routings and their attendant          and, because demand for the cruise was
costs in the model, recommendations will be         low, a large discount was also granted to
made on which passenger routings should             the group. When the air planning depart-
use the charter flight. For some cruise lines,       ment booked flights for the group’s passen-
this is a significant advancement over their         gers, only first class seats were available for
current manual procedures.                          many of the group’s members. The airfare
    One additional advantage the model              paid by the cruise line actually exceeded




                                                                                                                Page 17
Expanding the revenue management frontier




                              the price (for the cruise and airfare) paid by      Automated space planning and charter
                              the group’s passengers. Using the routing        flight planning tools can facilitate conduct-
                              model in a systematic manner could have          ing the above analyses. These tools are
                              alerted air planning and group reservations      similar to the route-optimisation tools,
                              staff to the potential for such a surprise,       although their implementation is more
                              although this would also have required           strategic and less tactical. To identify space
                              changes in how information is communi-           planning needs, cruise staff work with a
                              cated between departments.                       range of booking profile data that typify
                                 The routing tool also enables air plan-       the bookings for a cruise or a set of cruises
                              ning staff to provide valuable insights to        and explore the extent to which block
                              the marketing department. The cruise-            space and planned charter flights meet the
                              with-air demand by gateway can be                cruise line’s needs. ‘Stress testing’ based on
                              adjusted and the routing model can be run        forecasts of demand can provide air plan-
                              under several ‘what if?’ scenarios, depend-      ning staff with insights into where it would
                              ing on the promotions marketing staff             be most valuable to acquire additional
                              are considering. This may help them to           block space. Using these systems, a cruise
                              determine, for example, that, although air       line is more likely to be able to acquire
                              space is too expensive to offer cruise-with-      additional space where it is needed, while
                              air promotions in Midwest gateway cities         the space is still available. This translates into
                              for an upcoming July sailing, sufficient           lower airfare costs, since it leads to the
                              space at low airfares is available in the        reduced use of bump-up and non-contract
                              West.                                            fares and to higher load factors on charter
                                                                               flights.
                              BLOCK SPACE AND CHARTER FLIGHT
                              PLANNING                                         CONTRACT FARE NEGOTIATION
                              Each year, cruise lines estimate where they      SUPPORT
                              will need block space. Some cruise lines         At some cruise lines, the process for obtain-
                              will also identify opportunities for regular,    ing contract fares resembles a true negotia-
                              planned charter service. The process fre-        tion; for others, it is more of a price-taking
                              quently involves a high degree of manual         exercise. These cruise lines may attempt to
                              effort and, except for where significant           negotiate fares in a few cities where the air-
                              schedule changes occur, decisions may be         lines have asked for unusually high
                              heavily based on how space was actually          increases over the previous year’s fare level.
                              used (or planned) in the previous the year.      The contract fares set the foundation for a
                              Poor routing decisions may have an impact        cruise line’s airfare costs each year and are a
                              on space planning in subsequent years.           critical input to the routing model. This
                              Conducting extensive ‘what if?’ scenarios        section demonstrates how understanding
                              to determine how significant revisions to         and estimating the value of incremental
                              block space or charter flights might benefit       demand and the potential for revenue dis-
                              the cruise line is difficult at best, and typi-    placement, fundamental concepts of rev-
                              cally not possible. There may be few or no       enue management, can help in price
                              automated supports available to recom-           negotiations.
                              mend where such changes might help to               Based on our experience in the cruise
                              reduce air expenses. The ability to find          and airline industries, we believe cruise
                              such opportunities depends solely on the         lines have more negotiating leverage with
                              time and talents of the individual responsi-     the airlines than they realise. This has
                              ble for this task.                               begun to change, as an increasing number




Page 18
                                                                                                  Lieberman and Dieck




of air planning executives and staff have         So they make a good negotiating partner
been hired with airline experience.              for an airline — indeed, cruise lines repre-
Although they have a stronger understand-        sent the type of company that airlines are
ing of negotiation opportunities and have        most willing to negotiate with.
improved the air-planning capabilities of           The authors designed simple decision
their cruise lines, additional opportunities     support capabilities to enable a cruise line
remain.                                          to take the initiative in fare negotiations in
   The extent to which cruise line execu-        a systematic and credible way with airlines,
tives understand cost control opportunities      producing gains for both the cruise line
within air planning varies considerably. For     and the airline willing to negotiate a lower
example, during work with cruise lines the       fare in exchange for increased market
authors met with a number of senior              share. Key elements of the model included:
cruise-line executives who were surprised
to learn that, on some airlines, on some         (1) Use historical information to demon-
flights, the airfares paid by their cruise line       strate to an airline that some seats are
were consistently higher than the fares paid         generally available on flights on which
by many of the passengers who purchased              the cruise line wants to transport addi-
publicly available fares. The point here is          tional passengers.
not that the fares paid by the cruise line       (2) Estimate the number of additional
should necessarily be less than publicly             passengers the cruise line can transport
available fares; cruise lines place a premium        on these flights.
on having ‘guaranteed’ access to airline         (3) Estimate the additional revenue the
seats. Given this situation, however, cruise         airline will receive from the cruise line
lines do have an opportunity to exert lever-         and the cruise line’s savings in airfare
age during fare and space negotiations if            expenses if the airline provides the
they can draw upon the right information.            cruise line with a lower contract fare
   Airlines value incremental business and           and the cruise line delivers incremental
typically offer companies lower prices in             passengers to the airline.
exchange for delivering this business in spe-    (4) Monitor the cruise line’s routing deci-
cific markets (eg Seattle–Miami). Indeed, in          sions to ensure that the cruise line deli-
2000, Delta Air Lines earned over $2bn in            vers on its promise.
revenue through negotiating market share
for fare discounts with corporations. US         Most of the data and information needed
Airways recently reconfigured its market          to conduct these analyses are likely to be
share-based      contracting      programme,     contained within the cruise line’s databases
emphasising share shift in key city pairs        and should be fairly accessible. Perhaps the
(Jonas, 2001). Airlines, however, can be         most interesting element of the data-cap-
quite sceptical of promises, and need to be      ture programme is obtaining information
convinced that incremental business will in      on airline seat availability. Typically, this
fact be delivered; they are not in the habit     would not be information that an airline
of providing discounts for passenger traffic       would be willing to share with a cruise line
they believe they would otherwise receive.       and would not be contained in the cruise
   Cruise lines have virtually complete con-     line’s databases.
trol over the flights on which their passen-         It is possible, however, to capture avail-
gers travel. Consequently, they are              ability information from the reservation
extremely well positioned to deliver on          systems that display flight availability.
any market-share commitments they make.          Understanding how the cruise line can use




                                                                                                             Page 19
Expanding the revenue management frontier




                              this data goes to the essence of how a rev-      situation, the likelihood of displacing
                              enue management way of thinking pro-             higher revenue passengers is much less than
                              vided air planning staff with negotiating         if 40 per cent of these flights were full.
                              leverage they had not previously recog-          Thus, if the airline’s load factors in that
                              nised. In that regard, it is important to rea-   market are low, the airline might have a
                              lise that this information had been              strong interest in negotiating for incremen-
                              accessible to air planning staff, but no one      tal passengers. By presenting such detailed
                              had understood its potential value. As you       knowledge on the airline’s flights, airline
                              begin to understand the revenue manage-          staff would be less likely simply to look at
                              ment needs of the airline, however, it           the average load factor and then assume a
                              becomes clear how these data can be con-         high likelihood of displacement, as they
                              verted to negotiating leverage.                  might otherwise do. By demonstrating an
                                 Typically, reservation systems have a         understanding of the airline’s revenue man-
                              maximum limit they will display, such as         agement needs, the cruise line might ensure
                              seven or nine. So, while there may be 15         that negotiations reach the next level. In
                              or 65 seats available on a flight, the reserva-   short, the cruise line can demonstrate that
                              tion system will only show this lower            the airline has sufficient space for incremen-
                              maximum limit. When flight availability           tal passengers and will thus earn incremen-
                              dips below this level, the reservation           tal revenues.
                              system displays actual availability.                It is vital for the cruise line to establish
                                 Fortunately, for purposes of negotiating      that seats are typically available on the
                              lower contract fares in exchange for greater     flights it wants to use. Otherwise, as noted
                              market share, this provides much of the          above, airline staff may falsely believe that
                              information needed by the cruise line to         these flights are full and that it would not
                              make a credible argument. While a cruise         be profitable for the airline to provide the
                              line may not be able to determine the            cruise line with a lower fare in exchange
                              exact number of seats that have gone             for incremental demand. Airline staff
                              unsold in a market on the flights of inter-       would reason that if the flights are full, or
                              est, there are sufficient data to estimate the     nearly so on average, additional passengers
                              frequency with which additional passengers       from the cruise line might frequently dis-
                              could have been accommodated (eg what            place other higher-paying passengers.
                              percentage of the flights were really full).         If a basis for negotiating additional
                              Beyond that, the frequency with which at         market share in exchange for fare reduction
                              least five or seven additional passengers         is established, the cruise line then has the
                              could have been accommodated can also be         opportunity to exert leverage over the air-
                              estimated. Based on personal experience, if      line. Using historical passenger demand as
                              these estimates are sufficiently high, this        well as demand forecast data, in combina-
                              would provide a strong basis for further         tion with the cruise line’s growth plans,
                              discussion between the airline and cruise        allows a cruise line to take the initiative in
                              line for increasing market share in              demonstrating to an airline how it is well
                              exchange for a fare reduction.                   positioned to deliver incremental revenues
                                 For example, suppose a cruise line can        and passengers to the airline, even into the
                              demonstrate that all the flights in a market      future. Fortunately for the cruise line, it
                              on the days of the week that it wants to         can simultaneously reduce its total airline
                              transport passengers depart with empty           expenses.
                              seats, even though the average load factor          Tables 3 and 4 illustrate one form such
                              on these flights is 85 per cent. In such a        an analysis might take. In this example, it




Page 20
                                                                                                                  Lieberman and Dieck




Table 3: Year 2000 flown and cost data for a gateway city

Carrier   Passengers    Mkt               Capacity          Fare ($)          Airfare expense      Fare ranking
                        SHARE (%)         Share (%)                           ($)                  (1=Highest)

A          5,300          72               20               140                  742,000           3
B            120           2               10               135                   16,200           4
C           1460          20               40               150                  219,000           1
D            460           6               25               145                   66,700           2
E             40         <1                 5               125                    5,000           5
Total       7380         100              100                                  1,048,900



Table 4: Potential benefits by directing market share ($)

Carrier      Total benefits per incremental market share           Approximate fare reduction required to
             point delivered in 2001                              achieve equal sharing of benefits

                                                                  1 Incremental Point      5 Incremental Points
                                                                  of Market Share          of Market Share

C            10,346                                                3.85                    10.25
D            10,475                                               16.10                    32.95



is assumed that there is no year-on-year                  — If additional seats are available on their
growth in the number of passengers trans-                   flights, carriers C and D may have a
ported from the gateway city, no year-                      strong interest in reducing their airfare
over-year changes in the level of airline                   in this market in exchange for incre-
service from the gateway city, and that the                 mental market share. Both airlines
fares proposed by the airlines for 2001 are                 transport less than their ‘fair share’ of
identical to the ones paid by the cruise line               passengers (market share<seat capacity
in 2000. While these assumptions make the                   share).
analysis easier to explain and follow, they
can be easily relaxed.                                    Table 4 highlights the potential benefits
   In this example, the cruise line spent                 available if the cruise line were to direct
more than $1m on airfare to transport the                 additional market share to either Carrier C
passengers from this gateway city. Several                or D. For example, for each incremental
observations can be made:                                 point of market share that the cruise line
                                                          delivers to Carrier C, more than $10,300 of
— Most of the passengers were flown on                     incremental revenue would accrue to Car-
  carrier A.                                              rier C, if Carrier C obtained these addi-
— Carriers B and E have the lowest nego-                  tional passengers without reducing its fare.1
  tiated fares, but transported few passen-               By negotiating a reduced fare, the airline
  gers (this may have been because                        and cruise line are basically determining
  carriers B and E do not offer desirable                  how this benefit will be split between the
  schedules).                                             two firms. If Carrier C were to reduce its




                                                                                                                             Page 21
Expanding the revenue management frontier




                              fare from $150 to $146.15, and the cruise          relied upon to provide air planning staff
                              line transported 21 per cent of its passen-        with ad hoc reports. Given the current state
                              gers on Carrier C (rather than 20 per cent),       of online analytical processing (OLAP) and
                              both firms would earn benefits of almost             reporting technologies, this should no
                              $5,200. Carrier D would need to reduce its         longer be the case.
                              fare by more than $16, from $145 to less              A key aspect of the reporting system
                              than $129 for a similar benefit split. As           should be to provide senior management
                              shown in Table 4, the fare discrepancy             and departmental staff with insights into
                              between these carriers increases when addi-        the air planning department’s performance.
                              tional market share is directed to these air-      Critical elements of departmental and staff
                              lines.                                             performance might include:
                                 Although the total incremental benefits
                                                                                 (1) How successfully did the air planning
                              are similar in each case, it might be far
                                                                                     department negotiate contract fares
                              easier for the cruise line to negotiate an
                                                                                     with the airlines?
                              acceptable arrangement with Carrier C.
                                                                                 (2) How well did the air planning depart-
                              For the cruise line and airline to split the
                                                                                     ment identify the routes on which it
                              benefits equally, the cruise line would not
                                                                                     needs block space and the number of
                              need Carrier C to reduce its negotiated fare
                                                                                     seats it needs? How successful was the
                              as significantly. As noted in Table 4, if
                                                                                     cruise line in obtaining this space?
                              Carrier C agreed to reduce its fare from
                                                                                 (3) To what extent is the use of charter
                              $150 to just under $140, and the cruise line
                                                                                     flights reducing air costs and affecting
                              increased Carrier C’s share of passengers
                                                                                     customer service? To what extent have
                              from 20 to 25 per cent (five incremental
                                                                                     charter     flights    been      mistakenly
                              points of market share), Carrier C could
                                                                                     contracted for?
                              earn more than $26,000 in additional rev-
                                                                                 (4) To what extent are cruise passengers
                              enue, and the cruise line could also reduce
                                                                                     being routed on the best flights? How
                              its airfare expense by a similar amount.
                                                                                     would alternative routings have
                              Each additional point of market share
                                                                                     compared?
                              yields benefits of more than $10,000 to be
                                                                                 (5) What is the quality of information
                              split between the companies.
                                                                                     being provided from the the air plan-
                                 If this analysis is repeated for a variety of
                                                                                     ning department to revenue manage-
                              gateway cities, a strong potential emerges
                                                                                     ment staff with regard to flight
                              for the cruise line to reduce its airfare
                                                                                     availability and flight cost for passen-
                              expenses significantly. In the above exam-
                                                                                     gers booking future cruises (this infor-
                              ple, increasing Carrier C’s market share by
                                                                                     mation could be valuable in estimating
                              five percentage points would have reduced
                                                                                     the potential profitability and desir-
                              the cruise line’s airfare expense from this
                                                                                     ability of implementing alternative
                              gateway city by approximately 2.5 per
                                                                                     promotions)?
                              cent.
                                                                                 Specific performance benchmarks should
                              REPORTING AND PERFORMANCE                          be established in each of these areas. In
                              MEASUREMENT                                        addition, a well-designed reporting and
                              All too often, air planning staff are not able      performance measurement system, as part
                              easily to investigate anomalous situations         of an air planning programme, should
                              or answer questions posed to them by               leverage reservations data, airline seat block
                              other departments or senior management.            allocations, demand forecast information, if
                              Or, information systems staff must be               available, and cruise-line schedule data to




Page 22
                                                                                                  Lieberman and Dieck




provide air planning staff quickly with          thought of as an ‘after-the-fact’ capability.
information on many of the questions that       While valuable in this capacity, it can be
they typically need to answer in these          even more timely if it can facilitate man-
areas. For example:                             agerial control by enabling better decision
                                                making for future sailings. Exception
(1) Is there sufficient lift from a gateway
                                                reports, or alerts, can be designed to notify
    city to transport a group at a contract
                                                cruise staff when action needs to be taken
    fare? What is it likely to cost?
                                                quickly in response to developing trends,
(2) Given current reservations holding for
                                                prior to a sailing’s departure. For example, an
    a cruise, how much additional lift is
                                                alert might be triggered when airfare costs
    available from a gateway city? Is there
                                                from a gateway city exceed a specified per-
    enough lift available to profitably
                                                centage above the lowest contract fare in
    launch a pricing promotion in that city?
                                                that market. Or when the number of pas-
(3) Would it be cost effective to operate a
                                                sengers forecast to be routed on specific
    charter flight from Chicago to San Juan
                                                flights out of a hub exceeds a certain per-
    on 8th August?
                                                centage of the block seats on those flights.
(4) How much block space should be
                                                Such information can give the cruise line
    released? What level of risk does this
                                                the ability to manage the assignment of
    involve?
                                                passengers to flights and gateway city avail-
It is clear that these tools can also provide   ability more profitably.
critical information to cruise staff in mar-
keting, revenue management, inventory           SUMMARY
control and other departments.                  Improvements in the air planning capabil-
   Broadly speaking, information could be       ities of a cruise line provide significant
obtained easily and quickly on a wide vari-     opportunities for cost reduction as well as
ety of areas including: block space avail-      customer service improvements. Based on
ability, block space utilisation at various     experience, cruise lines can reduce their air-
dates to departure, passenger volume by         fare expenses by 5–8 per cent. Further, the
gateway city, airfare cost by gateway city,     systems described above can probably even
frequency and use of non-contract fares, air    lead to cost reductions of at least 3 per cent
cost analyses, air statuses of groups and       for those cruise lines that have made signif-
group air needs, charter flight availability     icant improvements to their air planning
and usage, routing analyses, etc. Such          departments in the past few years.
information would be available prior to            As cruise-line capacity in key markets
sailings, so corrective actions could be        continues to grow at a faster rate than airline
taken when necessary. To facilitate user        capacity in those markets, it will become
analysis, information should be easy to dis-    more and more imperative for cruise lines to
play graphically and users should be able to    pay greater attention to their air planning
‘drill down’ from high-level information        areas. The drive for higher levels of profit-
to detailed data, even to the transaction       ability will demand it. As with revenue
level, to facilitate problem discovery and      management, it is not a question of whether
resolution. At cruise lines where such          a cruise line is carrying out air planning. Of
investigations have a heavy manual com-         course they all are. Key questions to conti-
ponent, these capabilities will turn a sev-     nually ask are, ‘How can air planning be
eral-hour, or even a several-day job, into      done better?’ ‘What additional level of bene-
an effort that can be completed in minutes.      fits can be derived?’ and ‘To what extent
   Performance measurement is often             will these benefits exceed the investment




                                                                                                             Page 23
Expanding the revenue management frontier




                              required to earn these benefits?’ The authors        Cross, R. G. and Lieberman, W. H. (1991)
                              believe the tools described here can enable              ‘Yield management’, Futurescope, IV,
                              cruise lines to reduce their costs and earn sig-         April, 1–4.
                              nificantly greater profits, improve customer          Dickinson, B. and Vladimir, A. (1997) ‘Selling
                                                                                       the Sea: An Inside Look at the Cruise
                              service and increase their ability to plan for
                                                                                       Industry’, John Wiley, New York.
                              future growth.
                                                                                  Jonas, D. (2001) ‘Major U.S. airlines encounter
                                 At a broader level, it is hoped that this             turbulence’, Business Travel News, 2001
                              paper provides an impetus for revenue                    Business Travel Survey, 18, 12, 32–40.
                              management professionals to cast a wider            Kimes, S. E. (1997) ‘Yield management: an
                              net as they consider where and how to                    overview’, in Yeoman, I. and Ingold, A.
                              apply their craft. There may be many non-                (eds) ‘Yield Management Strategies for
                              traditional opportunities for revenue man-               the Service Industries’, Cassell, London,
                              agement to provide value. Based on                       3–11.
                              experience, the authors believe the search          Lieberman, W. H., Athanasiou, N. A. and
                              for such opportunities will be exciting, and             Buchin, S. I. (1993) ‘Short-term tactics
                              addressing them highly rewarding.                        for enhancing cruise line profitability’, in
                                                                                       Mathisen, O. (ed.) ‘Cruise Industry News
                              NOTE                                                     Annual 1993’, 6th edn, Cruise Industry
                              1    This analysis assumes that the additional           News, New York, 185–187.
                                   passengers flying on Carrier C are taken        Lough, G. and Pastor, J. (1999) ‘Data mining
                                   from the other carriers in proportion to            for revenue management’, AGIFORS
                                   the number of passengers they carry. In             Thirty-Ninth Annual Symposium, New
                                   fact, if the cruise line could disproportio-        Orleans, 281–296.
                                   nately reduce the number of its passengers     Schellenberger, R. (1991) ‘Negotiating for
                                   flying on the more expensive carriers, its           Airline Corporate Discounts’, Meeting
                                   airfare expenses could be further reduced.          Notes for Session A-1, prepared by
                                                                                       Runzheimer International, Corporate
                              REFERENCES                                               Travel West ‘91.
                              Anonymous (1991) ‘Want to make an airline           Shuman, D. (1991) ‘What yield management
                                  deal? Here’s how’, Corporate Travel, 18,             can do for railroads’, Progressive Railroad-
                                  12, 32–40.                                           ing, October, 24–29.




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