Profitability can be challenging in the airline industry. An IATA study from 2013 concluded that the return of invested capital for airlines was the lowest among 30 different industries in the comparison study. To improve profitability, airlines have started to focus on expanding their product offer beyond seats to include ancillary services, such as bags, advance seat reservations, meals, and flexibility options, as well as third party content.
However, offer construction is quite rudimentary today. While pricing of the flight seat is carefully considered through application of revenue management systems (RMS), with about 40 years of advancement behind it, little consideration is given to how the ancillaries are selected or, for that matter, priced. Today, this is taken care of in two distinct processes, managed under separate organisations, through different systems.
The objective of RMS is to optimise the revenue from airline seats alone, while merchandising’s objective is to expand the shopping basket (up-sell, cross-sell, and ancillary services). Also, limited attention is paid to providing personalised and more relevant offers.
We believe the current approach can be improved. At this year’s AGIFORS conference, I presented, in collaboration with Mathilde Gauchet, Remy Le Guen, and Stephane Lecourtois, our vision on the topic: the key to profitability is combining merchandising and revenue management systems. It is our vision that the IT system should “determine the optimal offer (both offer creation and offer pricing), for a given request, considering persona and contextual information”.
We envision a future where our technology will be the enabler behind a central system responsible for optimising offer creation, selection, pricing, and personalisation decisions. This needs to be supported by advancement in distribution capabilities to ensure consistency across all sales channels as well as a distributed computing environment to manage the increased traffic. This is a major shift from current practices.
We are working hard to push the frontiers of this next generation approach, and I am excited about what the future holds for the airline industry in this respect. Stay tuned to this blog as well as to our forthcoming paper in the Journal of Revenue and Pricing Management on this subject. For more information, you can also visit the Amadeus Airlines website for details about our solutions.