A MAGAZINE FOR AIRLINE EXECUTIVES 2009 Issue No. 2

Planning departments follow industry best practices to compete

Global carriers take various steps to remain in the black

Air Malta makes big changes across entire organizations

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A Conversation With … Dave Barger, President And Chief Executive Officer, JetBlue Airways, Page 14.

T a k i n g y o u r a i r l i n e t o n e w h e i g h t s

Happy Jetting

© 2009 Sabre Inc. All rights reserved. wearelistening@sabre.com

E-Commerce:The More The Merrier

Airlines can benefit from advanced revenue management technology designed to maximize group sales opportunities and minimize spoilage.

By Santosh Sah | Ascend Contributor

G roup traffic, generally comprising nine or more passengers traveling together, represents a vital seg-

ment of the total traffic in an airline’s net-work. However, group business is gener-ally perceived as a high-cost business, and many carriers don’t possess a well-defined business strategy to maximize group rev-enues without diluting individual passenger revenues.

While revenue management has evolved significantly during the last two decades for managing individual passen-gers, it’s another story for group traffic, which has lagged behind and is often identified as low yielding and too com-plex, causing it to be often neglected by airlines. But, when properly broken down and analyzed — peeling away the layers and identifying group products, the orga-nizational structure, technology and trends — it doesn’t have to remain low yielding and complex.

GroupProductsGroups are broadly categorized as

either “ad hoc” or “series” groups. The ad hoc group signifies a one-time travel request for one-way, roundtrip or multi-destination travel itinerary whereas the series groups are of a repetitive nature, and the group travel spans a set of departure dates. In the case of series groups, each departure date may be associated with its unique travel itinerary, group size and fare. Series group bookings are seasonal and often called allotments, such as summer, winter or special-event allotments, which are typically received and processed early in the flight horizon.

GroupOrganizationThe organizational framework for

group management at airlines is either centralized or decentralized. The central-ized framework enables consistent group pricing and administration of group con-tract compliance but is inherent with long turnaround times. The decentralized frame-work enables a quick turnaround time but is fraught with problems of inconsistent group pricing and contract enforcement.

The ideal organizational framework to effectively manage group demand is a combination of decentralized selling of groups with a centralized desk for process-ing inventory and pricing exceptions.

GroupDecisionSupportMany airlines lack a group decision-

support system to compute recommended group fares. In such situations, the group decision is purely based on inventory avail-ability, which leads to confirmation of too many low-yielding groups across the

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network. Similar to individual passengers, group demand can be segmented into three broad categories:

High yielding, Medium yielding, Low yielding.

An advanced group pricing decision-sup-port system creates a good mix of the three types of group demand to maximize overall revenue.

Group customers, especially the low-yielding segment, are generally considered to be more price sensitive than schedule sensitive and may be willing to accept an off-peak flight for a less-expensive price. Customer choice models can be used to correctly assess the price versus schedule tradeoffs. These are a special class of statistical regression models that are used to predict the likelihood of customers purchasing a given option when faced with several differ-ent alternatives (including “do not purchase” or “purchase flights on a competing carrier”).

In group decision support, choice models can be used to predict the selling probability of a specific flight and fare alternative based on the relative schedule and price attractiveness. So in addition to price, flights with more desirable departure times, shorter elapsed times and fewer connections are more likely to be chosen by group customers — mathematically, it is said that “probability of selection (flight) = f (flight attractiveness, group fare offered).”

While group sales agents easily recognize the schedule and fare tradeoffs, most automated group decision-support systems use a much simpler approach and simply recommend flights

with the greatest availability of discount seats (as well as maximum profit margin). Although widely used, this “greedy” approach ignores flight schedule attractiveness, and undesirable flights make it difficult to complete the group sale. Since lost group sales are also lost profits, a correctly designed self-service group capability should not be limited to flight profit margins only. It should also consider the flight’s likelihood of selection by prospective group customers.

A branch of decision theory known as expected value analysis is applicable to this prob-lem. The expected group profitability by flight can be found using the following function:

“expected profit (flight) = probability of selection (flight) * profit (flight).”

The group price quote should consider future individual passenger demand, real-time flight availability and agency/customer histori-cal performance. Collectively, these factors are used to determine the group displacement cost (essentially the breakeven price of expected future individual customers). However, based on the expected value analysis, the group price decision should also consider flight schedule attractiveness and potential competing offerings in the market place.

Using the estimated group displacement cost in conjunction with customer choice mod-els, the optimal group price can be determined. The group displacement cost is the basis for accepting or rejecting requests for the various categories of groups. It is computed based on the marginal value of an incremental seat in an idealized nesting structure that considers the marginal tradeoffs across all units as a function

of the forecast demand and current bookings by booking class. In the case of origin-and-destination inventory management, the mini-mum acceptable value (displacement cost per passenger) for the group considers the network effects to ensure a network-optimal solution. The rejection region represents combinations of group fares and group sizes that are not profit-able to accept.

Group pricing should account for the pub-lished fare along with any applicable negotiated fares. Generally, the process of identifying the actual group selling fare based on the computed displacement cost is a manual process at most airlines, resulting in a significant increase in the group desk organization to cater to increasing group segment demand across the network. The unsustainable labor increase in group handling costs with the rise in group volume may force airlines to reassess their business policy of carry-ing groups across the network (in the absence of automated support tools).

Overbooking is another important consid-eration. Group materialization rates impact the spoilage of inventory on high group markets. It has been observed that the agency/customer books groups early, and typically 70 percent of group bookings are cancelled before departure. In many cases, the agency/customer hands back a large quantity of seats to the airline very close to departure, leading to either spoilage or dilution of the inventory.

Naturally, it’s critical to ensure that inven-tory spoilage is minimized — a small percentage drop in spoilage has a large revenue impact — by effective tracking of the group materialization from the time of booking until departure. Passenger name record-based regression models provide one of the most robust and accurate means to forecast group materialization rates. Ideally, the pre-departure group PNR activities are used to influence the materialization forecast.

FutureTrendsInformation technology adoption in group

management has trailed behind passenger reve-nue management, but this is about to change due to advances in technology. Airlines have found it difficult to develop a compelling business case for technology solutions supporting group sales.

During the early years of the Internet, there was skepticism from consumers and sup-pliers alike regarding the viability of booking travel online. Today, online travel in the United States is approximately 60 percent of the total U.S. travel market.

The aggressive growth in online shopping and booking of travel proves that the Internet is the preferred shopping and booking method. Online travel has grown by leaps and bounds to become an essential marketing and distribution channel. One of the key travel segments for e-commerce is undoubtedly group travel. Yet, this segment has been behind the curve in the online migration.

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Ad HocGroup

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Allotment

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Adhocgrouptravelcomprisesasingledeparturedateforone-way,roundtripormulti-destinationtravelwhileseriesgrouptravelincludesmultipledeparturedatesforone-way,roundtripormulti-destinationtravelspreadoverarangeoftraveldates.

AdHocAndSeriesGroupProducts

The younger generation of group travelers is more technologically savvy and is comfortable with the self-service aspect of shopping and booking travel, but they need around-the-clock flexibility for shopping and booking.

Of course, there are four major challenges associated with group business that may require resolution for a migration to an online self-service platform, including: Complex and unique business processes, Manual and labor-intensive decision-making processes,

Lack of fully integrated technology platform supporting end-to-end group sales processes,

Adoption of new technologies requiring skill improvement of existing resources.

Airlines need to simplify and streamline group business processes to make them more efficient. It is necessary to evaluate the entire process supporting group sales and implement automated systems for end-to-end efficiencies. By doing so, airlines can significantly reduce group processing costs and become more effi-cient in the group sales process.

Group revenue management software has already made strides in automating the group decision-making process. The self-service group sales solution can leverage advancements that have already occurred in the group revenue management area.

The recent advancement in the integration of airline systems using an industry-standard Web services framework will help reduce the

complexity of creating an integrated platform that can offer full capability of online group sales. With the recent surge in Internet usage across the globe, the fear of learning newer technology is slowly eroding, and there is higher acceptance of Web technology that has evolved and requires minimal training for end users.

The group market is maturing and airlines need to work aggressively to automate group shopping, booking and fulfillment to avoid the risk of ceding the “first-mover” advantage in the online group e-commerce business. The transi-tion of group business to a self-service online group sales framework will give airlines greater insight into group shopping characteristics. Group shopping data can be leveraged to design and offer group products that meet customers’ needs. The various aspects of group selling can be influenced by the critical insight gained from group shopping data. In addition, group shopping and booking data can be used for targeted e-mail campaigns that can help boost demand on low load factor flights. Currently, airlines only target the individual passenger segment for promoting the distressed inventory and, in the near future, the group passenger segment will also be tar-geted for the sale of distressed inventory.

Traditionally, an airline’s call center is per-ceived as a cost center, but with the advent of online group sales, it can be transformed to a revenue center. Call center access will be avail-able to the basic-level customers with payment of service fees whereas premium group custom-ers can be offered this service free of charge. In addition, the self-service online sales platform enables airlines to bundle non-air content such as hotel, tour bus and activities with primary-air content to sell attractive travel packages to group travelers. The call center will also have the ability to cross sell non-air components to small and medium-size groups that typically only buy air travel from airlines. This will help generate significant incremental revenue for carriers.

One of the biggest challenges for the suc-cess of group online sales will be the adoption by travel agencies, corporate meeting attendees or leisure group travelers. Airlines can give incen-tives to those using their online group sales platform with best group rates guarantee. Once the benefits are established, there will be steady migration of customers to the new self-service group sales model. Airlines that prepare for such a shift will be ready to increase market share of their group business. a

Santosh Sah is a product marketing principal of Sabre®AirVision™ Revenue for Sabre Airline Solutions®. He can be contacted at santosh.sah@sabre.com.

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Groupsize

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Theultimateorganizationalstructureforeffectivemanagementofgrouptrafficcombinesdecentralizedgroupsaleswithacentralizedgroupdeskforprocessinginventoryandpricingexceptions.

Group evaluation (automated decision

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Automated group processing

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rules

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