Despite the global economic recovery over the past few years, airlines continue to face external forces, such as escalating fuel prices, unpredictable natural disasters, regional civil unrest and aggressive competition that can disrupt even the most stable revenue environments. In addition to such challenges, the rapid growth of industry capacity in emerging markets will pose its own set of challenges. The African airline industry, has experienced a 9% compounded annual growth rate (CAGR) in capacity over the past six years, as per February 2011 Redburn - The Global Capacity Analysis. Expectations of continued high rates of capacity growth within the African marketplace mean that airlines within the region face a pivotal period in improving revenue management practices and system capabilities in order to ensure no revenue opportunities are lost during this growth cycle. Some African carriers, generally the more established ones, have already begun this transformation with updated tools such as O&D revenue management optimization and new fare management systems to stay ahead of the growth curve. As markets mature, airlines increasingly rely on efficient revenue management best practices and system capabilities to extract the additional euro or dollar from the next seat sold, or at the very least, prevent revenue spill to competitors. At more developed stages, airlines within these marketplaces simply cannot survive long term without effective revenue management practices consisting of pricing, inventory management and revenue integrity.

Key To Jumpstarting The Revenue Stream

Pricing, the most important aspect to revenue management is also the most challenging to manage, due to the vast range of influences from outside the revenue management group. These can include volume-focus targets, since load factors are easier to track than fare base code specific ticketing, the perceived expertise of the field in market pricing, and factors external to the airline such as government regulations imposing artificial market constraints on operators. Airlines across the world find themselves in different stages of marketplace development where pricing strategies range from what can be considered simplistic (lax fare conditions), for developing marketplaces such as Africa, to highly tuned such as North America, where fares are specifically designed to target perceived value to a customer. For revenue management departments in African airlines, pricing strategies utilizing market segmentation principles based on customer behavior, can be the first step to achieving the step function change in revenue production above and beyond current budget targets. At a broad level, market segmentation principles are driven by the characteristics of customers when making decision about purchasing a ticket. For example, customers who value selection of schedule or particular day of departure tend to be less price sensitive than most other segments. On the other hand, customers who are driven by price, whether due to weak purchasing power or travel flexibility, tend to be much more willing to consider alternative flights or dates when making their purchase. By utilizing the basics of customer segmentation, revenue management departments can tailor specific fare offerings that cater to those types of behaviors through fare rules and conditions. As such, airlines can frame passenger behavior across multiple passenger segments. They can also differentiate by point of sale, from the local market to more distant points such as Europe, Asia or the Americas without sacrificing revenue production from each of those segments. It is true that different marketplaces will have varying degree of contribution per each of these passenger segments. Some regions are more driven by labor traffic, while other regions are business passenger centric, but regardless of marketplace, segmentation fundamentals hold true across all regions of the world.

However, no airline can effectively implement passenger segmentation as part of the Revenue Management portfolio without considering additional factors that will impact its pricing strategies. The pricing team must understand the competitive landscape, internal fare management capabilities, distribution of prices, market dynamics and pricing to inventory relationship through fare class optimization concepts.

These components impact segmentation and revenue.  All these factors require heavy focus on analytics, empowerment to say no to the field when needed, and rigorous focus on RASK performance at the network, region or market level.

Managing Perishable Inventory While Improving Revenues

The second area of focus in getting it right for African carriers is what many in the industry may consider the "black box" of the airline business; inventory management, also known across industry circles as revenue management, is part art, part science. At the most basic level, inventory management is selling the right seat at the right price at the right time to a customer who is looking for air travel services while minimizing potential spoilage of inventory that once the plane leaves the gate, it is no longer sellable. To achieve this desired result, airlines have been investing in complicated and highly sophisticated revenue management systems (RMS) based on demand forecasting, which estimates the probabilities of selling seats at various prices in the future based on historical observations, and allocations, which set the quantity of seats to be made available at a given price. In an emerging marketplace such as Africa, carriers that have deployed such capabilities have generally outperformed their regional rivals in revenue generation and expanded at a greater rate.

In short, better revenue generation means more resources which leads to opportunities for growth. For carriers with such tools, the continued key is effective application of internal processes to manage inputs and outputs based on informed decisions from proper measuring and tracking of key indicators such as booking rates, booking velocities, high yield spill, low yield spill, forecast accuracy, inventory class mix and spoilage of seats.  In addition, inventory staff should look for opportunities beyond just the numbers in the tool and apply measured level of risk taking to change the paradigm of what is expected to occur in the future in order to drive additional revenue. In essence, effective inventory management should consist of strategic seasonal demand planning, managing the demand forecast within the RMS, which triggers initial allocations, and taking degree of measured risk in adjusting allocations to balance load factors with yield for highest revenue output. For African carriers currently without an RMS, a growing number of RMS vendors in recent years now offer cost-effective alternatives. These systems are intended to fit into limited capital budgets and still provide an increase revenue production that will generate a return of investment within months. These options, supported by effective processes, will allow some African airlines to keep pace with their big brothers in the region while maintaining their niche.

Plugging The Leaks In The Revenue Stream

The third area of focus for revenue management departments is known as revenue integrity. This function has gained visibility as airlines have attempted to generate additional revenue, reduce costs and provide improved data input to their revenue systems. As pricing and inventory management areas look to drive and optimize revenue, revenue integrity area works as a dam that prevents revenue from leaking out of the enterprise by employing specialized, business rule driven systems that clean bookings within the airline's reservation system and prevent what is known as churn.

For all carriers irregular bookings are generated in airline reservation systems when seats held in inventory are highly unlikely to be used. Such flexibility, or as some may consider loopholes, in the booking process can lead to inventory being blocked and unavailable for sale during prime booking periods or released close to departure too late for a potential sale. In either situation revenue loss can be substantial, in addition to incurring higher distribution costs. More importantly, there is great value in preventing recurring losses beyond such events as inaccurate booking information is no longer fed back into the revenue management system. Such faulty data can cause repetitive poor demand forecasts which in turn set inaccurate initial inventory allocations. For some African carriers, opportunity exists to remove these irregular bookings from their reservation systems through third party tools, which offer rigorous processes, based on understandable business rules that allow carriers to break the cycle of bad data. Three main checks have been developed and can be easily applied within any marketplace. First, airlines look for bookings with potentially fictitious names that are outside the norm of typical traveler names. Second, airlines deploy duplicate name checks that attempt to identify multiple bookings for the same itinerary across flights, origin airports or span of time within the reservation system. Lastly, a procedure called flight firming, conducted through system checks or call out programs by call center staff, identifies bookings not ticketed within the ticket time limits required by fare rules prior to departure. Once these checks are processed, the irregular bookings are canceled from the system and inventory put back out for sale resulting in less booking churn. Whether it is application of such revenue integrity checks, efficient management of inventory control from forecast to allocations, or passenger segmentation through pricing, African airlines will need to speed up their revenue management practices to get it right not only in an emerging market, but a global one.

Mmankowski@seaburyapg.com; www.seaburyapg.com