Revenue Management and its applications: Airlines

A brief context of the implementation

Revenue Management systems (also known as Yield Management) were first implemented at American Airlines and Delta Airlines about 30+ years ago. Robert Cross – now president at Revenue Analytics, and author of the famous Revenue Management, Hard-core tactics for market domination – implemented this system at Delta. Robert Crandall – retired CEO at AMR Corp. and founder of Sabre distribution system – implemented it at American Airlines.

At that time, airlines used to set prices per class of service and per season.

In the hospitality industry, the implementation of a Revenue Management system was an answer to the necessity to steer an entropic market, with unreachable and numerous customers: every flight and every route represented new markets, where revenue had to be maximized. Revenue Management systems enabled continuous growth of travelers, (who were booking tickets over the counter at that time) along with the development of global distribution systems (SABRE, and later Amadeus), and the very first strong information systems.

The first preoccupation of early adopters of Revenue Management systems was to face the growing competition and the crawling crisis. Long story short, marketing efforts to stop the fare war were not enough, and a backroad between supply chain management, marketing, and information systems was the creation of Revenue Management systems. Revenue Management systems aimed at controlling inventory and maximizing the price of each seat contingent on demand in a real time system. The primary goal was to repair the market. In addition to the fare war, the expansion of the low cost airline PeopleExpress forced the market to offer more competitive call fares, such as ”ultimate super savers” by American Airlines in 1985.

The way it works in the airline industry…

As you may understand, Revenue Management is a very sensitive topic within airlines, but some of the key features are common to most carriers (including both flag carriers and low cost carriers).

Basic principles: How a plane gets filled

The fares are mostly function of time and load factor of the aircraft. During the weekdays, the main goal is to separate business travelers from leisure ones. During weekends, it is the contrary, which affects significantly the perspective for revenue: the strategy aims at having less but more profitable customers during weekdays in order to reduce operational costs. Every flight / route combination (one origin and one destination) is managed as a new service, where profit – and consequently the load factor - must be maximized. The more filled-up a flight gets, the more expensive your ticket will be. Besides, airlines usually like to offer tickets with distinct characteristics: flexible, reimbursable and re-bookable with or without fee, or non-flexible (simply put, if you don’t use the ticket you lose it).

Assuming that bookings increase over time, as a linear function, here are two graphs representing the evolution of the fares function of number of bookings (and so function of advance booking):

From what we explained in the previous paragraph, fares should increase with time. However, praxis showed a real difference. The second graph is the relevant one: there you can assess the dynamic of Revenue Management and its interest for a corporation - adapting exactly the pricing to the market situation based on historical data.


Note that the charts presented above, represent an observed trend, and not precise data to be analyzed in details.

Fares and booking systems

To model pricing in their revenue management system, airlines use price brackets, called “booking classes”, which contain a reference fare, (i.e. the flexibility and availability during the weekdays). Each booking class can be opened or closed according to the aircraft load factor and the achievement of the profit objectives. Cheaper booking classes have limited inventory (at the bottom of the ladder), last seat availability classes are available as long as a seat is available in the aircraft (at the top of the ladder).

Every airline has its own coding system for the reference fare (booking class + fare basis). Airlines also like to set low fares with more flexible reference fares for their corporate customers. This is a way to bias the market. This is what a travel agent can get in its global distribution system.

If you would like to have a better understanding on how Revenue Management systems work in a real life case, the MIT proposed a simulation of an Airline Revenue Management.

…and in other businesses

We want this blog to be interactive, and our goal is to gather a community of beginners and insiders, trying to create inspirations for businesses. Therefore, any valuable input is much appreciated.

More specifically, we invite readers from any background to submit ideas of business sectors where Revenue Management principles could be applied.