This article explores the methodology and reasoning behind the advantages of O&D-based revenue management control. Featured in this article are connections, codeshares, and responsibilities of other departments in an O&D environment.
Revenue management is a critical factor for the profitability of any carrier, and the methods of revenue-management control are therefore also critical.
Many airlines have switched from traditional control methods (such as leg-based control) to O&D-based control, which represents a more holistic approach. To manage a cutover from leg-based control to O&D-based control carries its own inherent risks, but analytical experts generally consider the change well worth it.
The chance to gain a large measure of knowledge based on the experiences of other airlines that have already switched to O&D-based control can be advantageous to carriers that have yet to make the cutover.
In that context, among the issues to be scrutinized here is the fact that O&D algorithms tend to favor connections much more than leg-based algorithms did in the past. (Although to be precise, the algorithms will allocate by enabling bookings, which maximize network revenue.)
Meanwhile, actions in other departments impact O&D assessments, and report and data-warehouse design should reflect the changeover to O&D-based control. Common data must be utilized in reports, thus cementing any particular carrier’s O&D-based system.
Connections, codeshares and the impact on others
In this article, the purpose is primarily to capture some interesting learning points from various airlines’ experience of switching from leg-based control to O&D-based control, emphasizing three main factors:
- Impact on other departments, including reporting and data-warehouse design.
By definition, using O&D as the means of driving revenue management will inevitably increase the amount of connecting traffic on an airline’s flight. Depending on the price of the booking, the software will favor giving availability to O&D (or passenger journeys) that use more than one flight leg. Such a situation has the effect of boosting the total revenue earned from the airline’s network.
As such, the total revenue boost from a carrier’s network is dependent on an airline schedule with good connections. This is a crucial element and underlines the vital importance of good scheduling.
O&D software used by revenue management takes the same decisions as the software normally used by an airline’s network-revenue department, thus strengthening the coordination between the two departments.
Similarly, O&D affords revenue management the same perspective as the airline’s sales department, which is structured by the point of origin (point of sale) and the passenger journeys from that origin.
By forecasting demand at the O&D level, an airline gains the capability to design its network to maximize revenue.
Although the creative tension between revenue management and sales will likely always remain (since revenue management seeks to maximize revenue through price and volume, and sales will tend to favor volume gained by reducing price), sharing the same perspective of the business figures to improve cross-department coordination, as well as the quality of the airline’s commercial planning.
While contemplating the importance of an airline’s schedule for O&D, the parallel importance of “planned connectivity” and planned “offline” revenue from codeshares cannot be overemphasized.
In the verbiage of codeshare agreements between airlines, there are clauses that determine how the revenue from the fare sold is to be divided between the “operating carrier” (the airline actually flying the passenger) and the “marketing carrier” (the airline that sold the ticket).
Because O&D usually results in higher volume of codeshare bookings, the carriers involved may want to look at their codeshare agreements in the context of expected O&D flows and, if necessary, renegotiate how the revenue is divided.
Reporting and analysis
Because O&D is so fundamental to an airline’s profitability, it also substantially impacts the way the airline will report its business, and this difference spans all department boundaries.
O&D-based control requires an actual performance versus budget-reporting capability on an O&D basis, including the capability to plan and monitor at the O&D level.
The upshot is that reporting centrally and at department level is required, so the airline must have the ability to produce these reports at the O&D level. Sometimes this may require an amendment to the design of the airline’s data warehouse to ensure that the O&D information is available for scrutiny in all departments reporting, from a single data source.
This can be an extremely important element of the change to O&D, especially in situations in which departments may argue over results and causes because they are applying different data, summarized at a different level.
Note, nonetheless, that leg-based reporting is still required in addition to O&D-based reporting. Leg-based reporting does not simply go away, because the airline must still report on a leg basis in reflecting and characterizing the way the carrier actually operates.
Furthermore, it’s difficult to accurately prorate costs across an O&D that consists of several legs, because costs are flight-specific. Again, then, reporting on a leg basis is still required as a practical cost necessity.
Looking ahead to the future
There are numerous key lessons to be learned when managing a cutover from leg-based revenue-management control to O&D-based revenue management control, particularly with regard to connections, codeshares and the impact on other departments, including reporting and data-warehouse design.
While it admittedly involves risk, managing a cutover from leg-based revenue-management control to O&D-based revenue-management control leads to potentially substantial benefits that justify the change.
Connections, codeshares and the responsibilities of other departments are crucial pieces of the O&D-control puzzle. They must be managed effectively to fully enjoy the benefits of this revenue management structure.
This article was republished from Ascend magazine.