Revenue Management

Question 1

In Revenue Management what are the 6 major areas?

Answer 1

Inventory Control, Nesting, Forecasting, Optimization, Overbooking, Pricing, Market Segmentation

Question 2

How does Inventory Control work?

Answer 2

keeps VFR (visiting friends and relatives) and Business class separate, to make sure to save seats for the last minute passengers

Question 3

How does Nesting work?

Answer 3

Nesting prevents high-fare booking classes being sold out when lower-fare booking classes are still open (its like a box within a box within a box and etc.) the inner box is cheaper and has a limit and outer edge is the expensive

Question 4

How does Forecasting work?

Answer 4

Airliners takes in historical bookings and plots them into a chart (such as causal model) then determines what routes can be establish in the near future or what’s their short-term, medium-term and long-term plans are they going to do.

Question 5

What are the types of Forecast and what do they do for each?

Answer 5

Short-term : covers day-to-day operations, evaluating current competitive situations in the market and equipment’s needed
Medium-term : one to five years, route planning decisions due to the change in immigrant and customs
Long-term : five to ten years, fleet planning decisions and financial commitments

Question 6

What are the process of Forecasting?

Answer 6

1. Analysis
2. Planning
3. Control

Question 7

How does Optimization work?

Answer 7

Evaluating multiple options on how to sell your seats to the customers and to whom you sell it to according to the type of class. Also involves in optimizing a/c and revenue.
Involves in using the booking curve (as the demand is high, the price is higher, as the demand is lower, the price is lower) note: x is booking days prior to departure, y is capacity

Question 8

How does overbooking work?

Answer 8

Balancing the spoilage and demand boarding’s
Demand is high, Price is high
Demand is low, Price is low
Overbooking curve: y is expected loss, x is capacity and booking limit, centre is total cost, left spoilage and right denied boardings
Only Full Cost Carrier does overbooking (its good)

Question 9

How does Pricing work?

Answer 9

three types of pricing:
Penetration (introducing a new product to the market, new route, forming your own image)
Status Quo (same, % of the market is the same)
Skim (high brand value = high price, when your product is superior, the brand supports it)
Goal is to adjust the demand to the “fixed” capacity
“Selling the right seats to the right customers at the right price and the right time”

Question 10

How does Market Segmentation work?

Answer 10

x is capacity and demand, y is price
shows a curve going down and within the curve there are boxes
each segment of the price represents classes (1st, Business, Economy)

Question 11

What is the Pricing Scheduling?

Answer 11

3 Years: Strategic Decisions
1 Year: Flight Planning and Pricing Policy
6 Months: Tactical Decisions

Question 12

How are the six major areas apply to the airport?

Answer 12

Inventory Control - separating passengers into categories (domestic, international, transborder)
Nesting - Co-operating with airliners in terms with pricing
Forecasting - predicting the future of passengers coming into the airport and the orientation of the airport itself
Optimization - using the booking curve to have enough spaces for passengers in the airport
Overbooking - demand high = high price, demand low = low price
Pricing - having a low cost terminal (big costco house)
Market Segmentation - the noise level close to residential areas

Question 13

What are the 8 unique characteristics of Full Cost Carrier (LCC)? Explain them.

Answer 13

1. Flexibility - a/c type, time and day, destinations
2. Service - service classification, entertainment
3. Frequent Flyer Program - earning miles, reward miles
4. Sales and marketing - discounts to passengers with membership
5. Capacity - multiple aircraft type, high price
6. Overheads - alliance, complex governance
7. IT - complex yield management
8. Hub to hub and is a flag carrier

Question 14

What are the 8 unique characteristics of Low Cost Carrier (LCC)? Explain them.

Answer 14

1. Capacity - single a/c type
2. Sales & Marketing - No discounts, No Frequent Flyer Program
3. Services - Free Seating
4. Flight Ops/ MRO - simple patterns
5. IT - simple network, simple core applications
6. Overheads - no alliance, simple rasm & casm accounting
7. point to point
8. Buy on Board (BOB)

Question 15

What are the 8 unique characteristics of Hybrid? Explain them.

Answer 15

Both LCC and FCC

Question 16

What is an Open Skies agreement?

Answer 16

A “bilateral agreement” between two or more countries that can fly any route they wish between the countries

Question 17

What is Cabotage?

Answer 17

What happens when a foreign operator carries passengers between 2 domestic points of another country

Question 18

Give an example of Cabotage?

Answer 18

Vancouver to LA (drops and picks up pax from LA)
LA to Mexico (drops and picks up pax from Mexico)
and so on

Question 19

What is Economies of Scale?

Answer 19

Also known as EOS

The more you produce, the per unit cost decreases.

Question 20

Give an example of Economies of Scale in major carriers?

Answer 20

A320 versus A380
A320 travels point to point , pays more in landing and departing fees
A380 travels from one point to another (longer destinations), pays one in landing and one in departing fees

Question 21

What are two types of passengers in an airline industry?

Answer 21

Lots of money = No time

No money = Lots of time

Question 22

What is Law of Demand?

Answer 22

Demand increases = Price increases = Lower volume pax

Demand decreases = Price decreases = Higher volume pax

Question 23

In Law of Demand, are they different for Business and Leisure?

Answer 23

Yes, Business has good time slots whereas Leisure picks wherever is cheap

Question 24

What is Elasticity of Demand? Give example.

Answer 24

A decrease in price = increase in total revenue

An example : Competition (routes), Travel distance and related price, Business vs. Pleasure, Time (when to travel)

Question 25

What are the characteristics of oligopolies? (hint: 6)

Answer 25

1. A few firms produce either similar or differentiated products
2. High barriers to entry
3. Substantial EOs (Economies of Scale)
4. Growth through merger
5. Mutual Dependence
6. Price rigidity and non-pricing competition

Question 26

How does oligopolies apply to the airline industry?

Answer 26

Class, Service, Price, Image, Naming their own aircraft

Question 27

What is bilateral agreement? How does it work?

Answer 27

Between two countries in an agreement. Example: two people signing the rates and fleets

Question 28

What is High Barriers to Entry?

Answer 28

$125 million to start Airline
Takes 6-8 months to plan routes
Plot time
5 year Revenue Loss
Licensing required (a lot of it)
Bilateral Agreement

Question 29

What is Mutual Dependence?

Answer 29

An airline cannot live without: computer reservation system (CRS), airport, hotels, rentals

Question 30

What is Bucket of Seats?

Answer 30

Same as nesting but in terms with seating arrangements rather than money.

Question 31

What is First In Strategy?

Answer 31

settle rules, game plan, develop in the first place

Question 32

What is Second in Strategy?

Answer 32

copies from First in and modifies it to something better