Publication Date: January 31, 1997

Airlines Put Database Technology To Use
In Revenue Management Strategy

By Ken Shulman

In 1983, just after Delta Air Lines reported its first annual loss, Robert G. Cross moved from Delta's marketing department to its consultants division to help find out how the company had ended up in the red. He was talking with people throughout the airline when he happened upon a group of 50 whose job it was to determine the number of discount seats to offer in future flights.

"I asked them how they made their decisions," Cross recalls. "And essentially they told me that they went on instinct. I thought a minute and realized that these 50 people were setting the marketing strategy for some 500,000 flights. It was then that the light bulb lit up in my head."

The art of fine-tuning supply and demand, known as yield management or revenue management, has become the watchword of almost every major air carrier. The strategy, designed to optimize revenue on every flight, relies heavily on database technology.

Where it was once sufficient to know that April was a slow month for Flight 107 from New York to Los Angeles, today's airline must be able to distinguish between the potential revenue of Flight 107 at 8:30 a.m. Tuesday and Flight 107 at 8:30 p.m. Saturday. It must be able to strike the proper balance between first class, full-fare economy, and discount seats on an August 10 flight from Atlanta to London, and a similar balance on the same flight in March.

"In any industry, the secret to profitability is in knowing what the customer wants," says Cross, an attorney by training and the founder and president of Aeronomics Inc., a revenue management consulting firm in Atlanta, Ga. Cross recently completed a book, titled Revenue Management (Broadway Books), and his firm has assisted over 40 airlines, including 14 of the world's 25 largest carriers.

"With the technology available to us today, we are able to scrutinize every individual customer transaction," says Cross. "We can see when and where there is demand, and we can see it way in advance. And as we can forecast future customer behavior, we can price our product appropriately."

A Customized Strategy

The concept of revenue management developed with the airline industry because of its specific needs, and it has led to the development of custom applications that enable airlines to analyze flights from the moment they are put up for sale until the moment the boarding gates close. Past performances are examined. Current trends are factored in. Sophisticated mathematical models and algorithms are applied to the information to predict the right mix of price and availability.

"It's no longer profitable to think of airlines as companies that sell seats," says Dave Near, senior vice president of intuitive products and interactive services at Galileo, a computer reservation system owned by a consortium of 11 airlines. "Now I know that different people will be willing to pay me different prices for that seat. The businessman who must depart and return on specific days and times is inclined to pay more for that seat than the college kid leaving for a backpacking trip across Europe. I have to determine how to be able to obtain the maximum revenue from the last-minute traveler without taking off with too many empty seats. I need to know what happened on that flight in December. What was the average price per seat? Were there any empty seats or denied boardings? There are millions of decisions to be made each day. One thing is certain. You can't do revenue management on a slide rule."

Revenue management requires sophisticated database technology that can handle millions of decisions and provide operators with responses in milliseconds. The client/server architecture and UNIX platforms required to host these systems are expensive, running from $200,000 to $20 million, yet the potential rewards are also great. According to industry estimates, revenue management can boost revenue between 5 and 10 percent. And, depending on expenses, that additional revenue can translate into profit increases of as much as 100 percent.

"Scheduling and pricing are pretty much fixed in advance. Yield management helps us to fine-tune, to adjust to the day-to-day variations in demand," says Barry Smith, senior vice president at SABRE Decision Technologies in Dallas, Texas. Owned by American Airlines parent AMR Corp., SDT is an industry leader in revenue management. "In the past, the concept was one of mass marketing," Smith says. "Now customers will begin to see products more tailored to their specific needs. And the new generation of hardware and software in yield management allows airlines to develop and integrate these new products into their overall marketing scheme."

Forecasting demand relies on the proper analysis of past demand. For a major airline that offers close to a million flights a year, the idea of mining through the mountains of data produced by those flights is a daunting one. Delta's database occupies 300 gigabytes of space; it would be 10 times larger were it not entered in summarized form. Yet it is not the size of a database that makes it valuable to an airline. It is, instead, the capacity to interpret the information within the data, and to apply it to current market conditions.

"This is not a simple historical relationship," says Cross, who has applied revenue management to industries including car rental, cruise lines, hotels, utilities and broadcasting. "What we are interested in is what our history tells us about our future. The future is predicted on a proper assessment of the past. If you don't examine the right factors, you're not going to be able to come up with a very good forecast."

Cross' revenue management system includes four steps:

• The data-gathering stage.
• The information stage, in which information is gleaned from that data.
• The knowledge stage, which involves predicting future passenger behavior.
• The wisdom stage, in which the company decides how to best profit from the forecast.

Cross' strategy is to maintain a relatively narrow focus, intent on identifying a company's greatest opportunities for revenues. His system has an internal error detection feature that calls suspicious results to the operator's attention.

"There are still 50 people working in that division at Delta," Cross says with satisfaction. "They now handle about twice as many flights as they did when I was there in 1983. And they do it a hell of a lot more effectively."

New Systems, Refined Information

With the introduction of fourth-generation yield and revenue management systems three years ago, airlines have been able to further distinguish between customers and to analyze their value as passengers.

"The third-generation systems that we were using could tell me how many business, full-fare, and discount passengers took Flight 240 from Dallas to Seattle," says Terry Elliott, managing consultant at the Unisys airline development and support center in Minneapolis, Minn. Unisys has provided over 120 airlines with yield management systems, and manages similar systems for 200 more carriers. "But I am in error if I assume that all the passengers in a single class are of equal value to me. Some of them might just be flying from Dallas to Seattle. But some of them might have boarded in Miami. Others might be en route to Japan. With the fourth-generation technology, I can identify these customers according to their itineraries, their origins and destinations. Some of these passengers might be connecting with another carrier with whom our pro-ration agreement is not particularly good. With this knowledge, I can make this flight more profitable."

The same technology that allows airlines to predict customer behavior is allowing certain travel agencies to better suit their clients' travel needs. Travel agencies can use the market knowledge gleaned from their data to negotiate better package deals with airlines, hotels and rental car companies, and to target specific segments of the market with those deals. They can also capture a company's travel data and construct databases to analyze expenditures. In many cases, the client is provided direct access to these databases.

"We instruct them how to make specific queries," says Dean Sivley, vice president of marketing and chief information office for Rosenbluth International in Philadelphia. With over 1,000 wholly owned locations and representatives in more than 40 countries, Rosenbluth is one of the world's largest travel agencies. "A client can ask the system to show him how much he spent on hotels in Chicago last November. He can see whether he has spent his travel dollar well, or whether he might be more efficient."

Individual airline customers also stand to benefit from the carriers' investment in information technology. "Airlines have got to change their faceless transactions into something more personal," says Elliott. "Imagine calling an airline or travel agent to make a booking. And as soon as your name is entered into the computer, the agent gets a readback that you are entitled to a free upgrade because your last two flights with this airline were delayed. Fixing a problem like that, in a timely manner, makes people more loyal than they would be if they'd never had a problem. And customer loyalty is one of the keys to profitability. We are not too far away from being able to do this. In fact, we are building this capability right now."

Ken Shulman writes from Cambridge, Mass.

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