Recently I spent a fascinating day with a major airline, which, to increase partnership with the consultant community, invited me for a day where they lifted the lid on some of the more opaque processes within its operation. One such session was around yield management, a discipline utilised by carriers to maximise their revenue per seat, which is often viewed as some kind of 'dark art'.
As part of the session, a mathematician (aka the head of revenue management) explained the technology and thinking deployed to develop algorithms to make literally millions of fare changes a day across this carrier's not insignificant route network. In order to visualise the complex model he portrayed (after all, I'm not a mathematician) I asked a very basic question about how this all applies in practice which went something like this…
"I follow football (or depending on where you are reading this, soccer). In a few days' time, a group of suited men will draw balls out of a bag and decide where my team will be playing in this season's Champions League. Will it be the salubrious surroundings of Madrid, or a slightly less so stadium somewhere in Eastern Europe on a dozen wet evenings in the autumn? Thousands of football fans will be sitting watching this draw, ready to quickly book flights to go and see their heroes in action."
"Explain how your algorithms manage that," I enquired. "Will you have a team watching the same draw ready to push the button and add a zero to the prices to profit from the surge in demand?"
The response surprised everyone in the room and sparked a realisation
He explained that not was a team ready to act but the work had already been done and pre-loaded in the system. The airline already knew what days the team typically plays and that they won't play at their home ground on the 28th September, due to a major conference taking place in the city. It had developed detailed analytics quantifying the probabilities of the team being drawn against each of the possible 35 other teams in the tournament, then mapped it against the most appropriate flight times and benchmarked against competitors' routes, schedules and fares.
He added, "Only you can't see these fares yet, because we have hidden the higher fares two seats in. The first two lucky folks who go online will get a bargain and we will give them that as we like to share good messages. But after those two seats are gone, the bookers will see the 'surge pricing' we have calculated is the correct price based on detailed elasticity of pricing formulae."
The look on everyone's faces was something akin to Jeff Goldblum and Will Smith in the film 'Independence Day' when they fly into the alien spaceship and observe first-hand the size and sophistication of the opposition.
A single look to each of those in the room told a realisation that 'the game was up' and resistance is futile.
After all, most consultants, travel managers or buyers are employed primarily for one reason and one reason alone. They need to understand the techniques used by suppliers, and work to ensure that their companies can perform well and can buy better than market rates. With such advanced intelligence used to apply to low season flights around Europe for football matches, how can we ever hope to install buying strategies in our organisation to perform well on peak time business routes?
Furthermore, if airlines can deploy such intelligence today, with fairly rudimentary distribution tools at the disposal, what will they be able to achieve once they have the enhanced merchandising opportunities bought about by NDC and its associated 'big data' on our companies and travellers?
How can travel buyers compete?
1. Strategy. Buyers have different strategies. One, whose major routes offered significant and credible competition, chose not to share data with each carrier. Whereas another, whose major route was a virtual monopoly, freely handed over all data. They asked which approach was right.
The answer of course, is they both are. When you have major competition, leverage is a great approach and playing suppliers off against each other, holding cards close to chest, is a great strategy. Conversely, where you have a monopolistic market, you want to build a partnership and collaborate, sharing data to demonstrate a partnership. There should be no 'one size fits all' strategy for your air programme. Apply the appropriate sourcing strategy for your conditions.
Some travel buyers of size have even been known to charter their own aircraft rather than pay for increased monopolistic pricing of a sole carrier on a route, until such time as the carrier is prepared to reduce prices.
2. Managing leakage is critical. If your company pays on a central payment vehicle, such as a lodge card or Virtual Payment Card (VPC), you are probably in a good place as it is easy to spot maverick spend directly on expenses. If the policy sees travellers pay on individual corporate cards and you charge TMC fees at the point of sale, then you will have leakage and potentially lots of it on low-value and low-cost carrier spend. Recognise it, find it, deal with it. You can't manage what you can't see.
3. Install software that re-checks airline rates up to the day of departure. It will be the best investment you ever make, whether you spot-buy, contract rates, use tour TMC leverage, use corporate mileage programmes or just book 21 days out.
4. Optimise data. Data is key but consider what it is telling you, what you can do with it and how it compares with others in your sector. Contextualisation is key and if a report doesn't hit you with a 'so what', then it's wasting memory.
5. Look to the future. The debate around NDC rumbles on. One of the benefits, we are told, is the ability for the carrier to offer a personalised shopping experience to the end user, more akin to buying on Amazon. Buyers are troubled by this for a number of reasons:
- The offers they want travellers to see are the ones sanctioned by the company, and not special offers enticing travellers to go off programme
- Any loss of perceived power of control could significantly damage a buyer's ability to negotiate, and those pushing through NDC should not be surprised at the level of pushback from the buyer community
Having seen what level of sophistication airlines are capable of pre-NDC, there are many who are concerned as how airlines can use big data to market personalised offers to travellers, often to the detriment of travel policy.
The pro-NDC debate is very well-formed and very slick — buyers should continue to engage to ensure there concerns are fully aired and addressed.
It is clear that airlines (and hotels for that matter), continue to employ ever more intelligence-led approaches to yield management.
For buyers, giving up is not an option, and the starting point is to understand what you are up against, and to use all the tools at your disposal to match this intelligence.