The exhaustive monitoring and control of costs is a vital element for the air transport industry, like any other enterprise. Air operators, including the so-called “low-cost carriers”, do not have much leverage to differentiate themselves from their competitors other than matching their fleet planning to the flight program, and ensuring that the program itself is dense and consistent enough to be considered efficient.

The keys to success for an airline are therefore limited to defending and consolidating a profitable flight program, which is heavily affected by the choice of operating bases (whether such choice is strategic or simply emotional). And additionally, by the benefits and strengths of the different distribution systems that airlines are willing to use to strengthen their value proposition […]. But whatever an airline manages to achieve in terms of revenue management can really make the difference.

This practice, which in my opinion could be defined as “science”, is the element that evolved the most in this sector in recent years, together with the development of increasingly fuel-efficient jet engines. In just a few years we have left behind the practice of basing published airfares on mere interpretations of what different types of traffic needed (business, leisure, ethnic, etc.). These airfares were adjusted according to seasonality and followed a pattern that was predictable for customers, intermediaries, and competitors alike.

This “science” has evolved in its strive to discover the algorithm which enables to maximize revenue for each available seat, at least in theory. This is possible thanks to intelligent calculations based on the analysis of consumers’ demand at any given time, adjusted to historical data. On top of that, the calculations take into account the competitors’ supply levels on each route, both in terms of number of seats and price. The combination of these calculations generates a forecast that determines the price of each seat at any given time. Moreover, it allows to monitor a certain flight’s estimated load factor on a specific date, thus enabling the identification of possible weak spots that require actions to stimulate demand and increase a route’s overall profitability.

Many factors come at play when operating a route and airlines have made great efforts to develop good revenue management practices. These results can be deemed satisfactory in general, although they are still clearly not enough, given the circumstances. Up to the beginning of this year, this “science” was improving slowly, albeit gradually, thanks to more rigorous and precise data, as well as better data-processing speed, while still being subject to the same supply and competition variables mentioned before.

The current health crisis and its global consequences have thrown into question the validity of the theories that so far constituted the basis of revenue management. The ecosystem has gone through an extraordinary transformation that affects each and every variable at the basis of the algorithm that airlines relied upon to light the way. The competition is no longer the same, costs need to be readjusted and, especially, the level of demand can hardly be compared with what has been recorded until now.

The “science” behind revenue management will necessarily have to be reviewed and adapted to the new circumstances. In addition to adjusting figures according to the current situation, new variables that were previously deemed as implicit will surely be thrown into the mix. As the established formulas have clearly changed and will take some time to be applicable once again (if ever), it will surely become necessary to add a new variable to the mix: something that we might call ‘willingness’.

Until now trips were built upon a purpose, and this was the basis for the fares’ segmentation between Business, Leisure, Ethnic, etc. Nevertheless, in our current situation, and as far as we can foresee, trips may now need to be classified as Appealing, Advisable, Necessary or Essential. From now on, the possibility to generate revenue for an airline will depend on the ability to identify which category each passenger belongs to and I assume that these “scientists” are already working on a new algorithm.

Gerardo Manzano

CEO at Europair