As passengers shove their way onto planes these days, you can practically hear the grumbling thought: in these recessionary times, shouldn’t everyone be staying home and giving me some leg room? High end restaurants and stores are empty, why aren’t the planes?
In fact, airlines are operating with record high load factors – averaging in the mid eighty to ninety percent range. Blame that middle seat you’re stuck in on the highly sophisticated management systems that are now employed by most airlines. There have been a lot of questionable decisions in the last decade, but one thing the airlines have excelled at is refining revenue and capacity management systems that are the envy of many other industries. Just our luck.
Airlines have a highly perishable product, so it is essential to get the most revenue out of each flight before it departs, or the sales opportunity is lost forever. They began by segmenting their flights into different categories. The highest category – such as business class – would have the fewest restrictions, hence the highest price. The more restrictive the fare, the lower the price, as in the case of a seat sale. To make sure they maximize their revenue and sell the most seats in the in the highest classes, the airlines developed highly sophisticated computer models to control pricing.
The systems are based on probability formulas which predict demand for a flight. They punch in all the variables — historical data (how did the same flight do last year?), seasonality, time of departure, present booking trends, competition, economic data and market input from the field – and segment the flight revenue opportunity accordingly. It is far from being an exact science, but armed with this information the revenue analysts can quickly determine how well a flight is progressing and take the appropriate action to optimize revenue.
If a flight is not performing well, most likely more seats will be made available in the lower, more restrictive, classes which are of course less expensive. And to further stimulate sales, it may be necessary to introduce a seat sale. What is happening in the present economic climate is that the higher yielding business market has contracted significantly, which means that the seats allocated to that segment are not being sold.
To try to make up for this shortfall the revenue management people have to allocate more seats in the lower classes. Unfortunately, you have to sell a lot more of these seats to generate the same amount of revenue. That is why the airlines are pushing to fill every single seat – they need to make up the difference. Even with a completely full flight, the airline likely isn’t making money, but at least they are losing less.
Revenue and capacity management go hand in hand. When an airline does not think it can stimulate enough demand at the right price, it reduces capacity. This can be done in two ways – both of which are longer term strategies since reassigning aircraft, crew, slots and published schedules cannot be accomplished overnight. The airline either cancels certain flights, or puts smaller aircraft on a route which will at least maintain their schedule integrity and prevent competitors from picking up their valuable unused airport slots.
When times are good and business people are travelling, there is not the same pressure to have full flights. In the present environment, the only way the airlines can survive is to have their revenue management systems working flat out to fill the flights with as much revenue as possible. And that means selling almost every seat.