ATW article on Revenue Integrity...
Mind the gap
By Joan M. Feldman (Air Transport World Sept 2001 )
Airlines spend millions on sophisticated revenue management systems but still pay relatively little attention to revenue integrity, although the payback could be even larger
Revenue leakage the gap between the revenue that airlines book and the amount that they eventually receive is a big problem. Preventing it is especially important in a traffic downturn. Airlines' long standing inattention to that leakage while simultaneously blaming external forces for all profit problems is disingenuous.
Slowly, revenue managers are acting to stop the drain, developing revenue integrity software designed to enforce ticket- and fare- related rules from the time a PNR is created. Nick Bredimus of Bredimus Solutions in Dallas declares, "Airlines can switch it on very quickly. If senior management knew it was available and saw how simple it is, they'd want someone shot" for not installing it. He claims that depending on the size and extent of application, "within a few months they can save $50-$100k and many of them several million dollars. There are no breakthroughs in revenue and yield management offering that payback."
Marilyn Hoppe, who has directed yield managers at several airlines, agrees. "It's the cheapest thing available, costing perhaps a few cents per segment, yet if you can free up one seat [e.g., by canceling a subminimum connection that a traveler can't make] you could produce hundreds of dollars in revenue [from the then-freed seat]." Moreover, according to Ken Otwell, co-creator of Calidris revenue integrity software, "A major advantage is that if you eliminate the bad [e.g., fake or duplicate] bookings, you reduce CRS booking fees. You can justify the investment on those savings alone."
No-shows are, of course, the big problem. AEA estimates the net cost of no-shows at an average 1.6% of annual revenue. In a slim-margin industry, that's a lot. United Airlines Director-Revenue Management Support Pat Lilly reports, "When we first installed our software, no-shows went down by a couple of points."
British Airways started building elements of revenue integrity in 1993 and now claims up to $93 million in annual savings from a half-million-dollar annual investment. BA is so pleased that it is preaching the revenue integrity gospel industry wide. Paul Rose, BA revenue manager-alliance systems and development, gets credit for creating the phrase revenue integrity and is BA's preacher. Why the effort? If all carriers enforced rules, they no longer would have to reduce fares to match those with liberal attitudes. Still, big BA has only three analysts monitoring reports. Its automation process has been steady, albeit slow. Rose admits, "In an ideal world, we'd do it all overnight. But we're doing first things first," meaning international tickets. Even if all airlines don't invest in the software instantly, Rose at least wants his oneworld partners to cooperate. "We recognized early that we wouldn't have a single revenue management system but at least we could harmonize our approaches. It's the same with revenue integrity." Finnair, a oneworld member, is Calidris' second customer.
Trip Davis, head of TRX in Atlanta, which specializes in customer service fulfillment and automated processing, has a broad view of what's occurring. Yes, he agrees, "Revenue integrity is a hot topic. Since agents still handle so many processes manually, from selecting a meal to ensuring fares are real, it's the biggest [revenue/cost] opportunity in the mid-office. And some carriers are implementing it. But cutting distribution costs [Orbitz, Hotwire, Opodo] remains a higher priority."
Meanwhile, more vendors are developing software. Otwell and Calidris partner Magnus Oskarsson are long-time revenue managers. Reykjavik-based Oksarsson explains, "Traditional revenue or yield management maximizes the revenue...in the pre-booking period. But this only represents a limited part of the total revenue opportunity. When a booking is made, it is not certain it will be used and, if used, it most likely will be changed quite a lot." In between, revenue disappears in problem areas such as duplicate and unticketed bookings, incomplete or double itinerary bookings, fake names, waitlists, ticketing deadlines, schedule change impact and group sales.
Bob Mann of R.W. Mann & Co. declares, "If you look at CRS, ticketing, airport and revenue accounting processes, there are A380-sized holes through which an individual--a consumer, an agent or an airline employee--can covertly or inadvertently allow a lot of revenue to slip." Rose is more specific. "Seventy to eighty percent of the abuse is caused by agents, not passengers."
Hoppe cites examples plaguing international flights, where sales staff members in various regions of an airline play havoc with forecasted seat allocations by doing too many favors for too many customers. That is especially true of group sales--which, she calculates, produce anywhere between 20% and 50% less than revenue managers' allocations. Ethnic markets are the most notorious--salespeople offer group rates for specific flights on specific days but wholesalers and agents, often with sales help, fill seats with individuals.
A big piece of the problem relates to revalidation stickers, eliminated in the US but not elsewhere. Hoppe says airlines excuse their use by saying "the competition does it. Travel agents and frequent fliers get rolls of them." Last year an attempt to eliminate stickers within IATA's European traffic conference failed due to a single no vote by KLM. The airline may change its vote this year.
Starting with an early 1990s project to solve a US airline's overbooking problem, Mann and the cofounders of Airline Automation Inc. of Tucson developed flight-firming software called Predator to ensure that tickets have numbers and that the numbers aren't fake. AAI's Frank Arciuolo declares, "Flight firming is 80% of revenue integrity." Unlike other vendors, whose software is installed at the clients' facilities, AAI runs a 24-hr. service from its headquarters. It has developed additional software checks since Predator was launched.
Lilly generally agrees with Arcuiolo's assessment. Then, he notes, "It's a matter of going through the process in a timely manner and figuring out what you have, then using it effectively. We're basically concerned with passengers showing up. Reducing the variability helps eliminate wasted seats and denied boarding." It is key to helping United sell seats at the highest value while maintaining high load factors. The carrier still develops all revenue software in-house.
BA began building its software in-house in 1993 with cancellation of connecting flights for no-shows. This now is up to 400,000 seats a year. Cancellation of unticketed PNRs, begun in 1994, exceeds 600,000 annually. And it has class-based ticket-firming checks with all major CRSs. These go out at various times ahead of the flight.
A key reason for the recent renewed interest in revenue integrity software is the availability of more information. Lilly says: "The CRSs finally invested money in software that automatically sends messages when a ticket is issued. The next step is actually to have a fare quote in the PNR, which has not been consistent and isn't a requirement now." Introduction of the much-delayed ATB2 has helped in the short term but e-ticketing will produce far more improvement.
Increased information breeds still more automation potential. Bredimus and Dallas-based Lanyon have installed or are working on software that allows analysts using graphical tools to write applications or change rules as new patterns emerge, and to do it without programming intervention. Bredimus says of his Flash product, "End users must be able to maintain it and incorporate new uses as they come along. It can all be done with keywords...by identifying databases or lists." BA also has begun using Lanyon's DigitalQueue for chores such as ensuring codeshare schedule reliability and flight firming that had been handled manually in India.
While they have improved some, CRSs are still a major source of ticketing and fare abuse. Aleks Popovich, GM-revenue management at BA, notes, "We're only just getting the CRSs to spend money on revenue integrity and make it a priority." But in the face of online competition, CRSs also represent an ever-lower percentage of transactions while hanging onto their processing role. So Popovich "can see a lot of further risks. The Internet gives passengers more access to inventory," opening the way to more abuse.
Most airlines are not even close to placing all inventory on the Internet. Many do have websites, whose constant upgrades offer opportunities to build defenses against newer abuses. Lilly explains, "CRSs and [hundreds of] online companies are using technology to search for the best fare," so-called caching. The system can't handle the barrage of queries so vendors store the information to sort later. This produces problems when seats disappear in the interim and for O&D, not leg-based, revenue systems. Lilly says, "That's vexing when you operate at a high load factor and want to take the most valuable passenger." Rose says, "It's much more difficult to fix revenue integrity with thousands of online companies."
The human factor
Despite the new software, several people emphasized the human factor in achieving revenue integrity. Bob Mann of R.W. Mann & Co. explains, "A lot of it is little robots generating reports. But these reports must be audited, and supervised by people, who do pattern recognition better [than automated systems]." That goes for simpler processes as well as more sophisticated software that taps different databases at once.
Paul Rose of British Airways adds, "Some analysts can smell a rat in a PNR by experience--for example, when a handwritten ticket is presented in the UK." And, he notes, BA revenue staff also talk to airport colleagues. Still, he advises, check-in agents shouldn't be depended upon to catch or deal with all abuses. Enforcement will succeed as a result of automating the process and applying it consistently. Rose tells of one incident when an airport-based analyst went down to a check-in desk and pulled aside a passenger perhaps innocent, perhaps not--with a fraudulent ticket. Mann suggests that if an analyst or gate/counter agent spots a discrepancy, "it can be flagged and the issuing agent or customer can be 'educated' [warned] or debited. I'm not suggesting everyone's a crook, but everyone could stand more education." That individual airlines are attacking sloppy enforcement of fare and ticketing rules is a good, if way overdue, idea. And, Rose insists, it is not a competitive issue but rather a way to "reinforce the pricing structure."
Contact: Paul Rose-Chairman
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