1Copyright © 2002 by PROS Revenue Management
Fare class rationalization is the process of aligning fares within fare classes so that leg/class revenue management systems can operate to their fullest potential.
This new fare class structure is created by considering network displacement costs, point of sale attributes, business policies and alliance requirements.
We introduce the basic premise behind fare class rationalization and describe practical experiences in applying it.
AbstractAbstract
2
Experiences with Fare Class Rationalization
Experiences with Fare Class Rationalization
Antonio RuggieroApril 18, 2002
3Copyright © 2002 by PROS Revenue Management
AgendaAgenda
Rationalization Concepts Process Difficulties Encountered
Simulation Results Summary and Questions
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RationalizationConcepts – The Business ProblemRationalizationConcepts – The Business Problem
Inventory Control –
Leg/SegmentPricing -
O&D
Demand - O&D
Sales - Regional
Integrates Pricing, Planning, Sales, and Inventory Control to
maximize network revenue
Rationalization
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RationalizationConcepts – The Business ProblemRationalizationConcepts – The Business Problem
Point-of-sale Alliance agreements Currency Commercial
modifiers
Negotiated deals Interline proration Codeshare proration Travel agency
Fare product values in a booking class may be different due to:
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RationalizationConcepts – The Business ProblemRationalizationConcepts – The Business Problem
Itinerary proration to the leg-fareclass
AAA
BBB
CCC
DDD EEE
$1200
$800
$350
$600
Itinerary Itinerary Fare Y FareclassAAA-DDD-EEE $1200 $650BBB-DDD-EEE $800 $550CCC-DDD-EEE $600 $500
DDD-EEE $350 $350
DDD-EEE Leg Proration
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Problems with an improperly rationalized fare class structure. Fare products in a Fare Class get same protection
Limit availability of highly valued seats to low paying demand
Not placing appropriate protection on fare products.
Highly protecting itineraries of low network value. Not giving enough protection to itineraries of high
network value.
Fare overlap among fare classes reduces Revenue Management’s effectiveness
RationalizationConcepts – Business ProblemRationalizationConcepts – Business Problem
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RationalizationConcepts – Business SolutionRationalizationConcepts – Business Solution
Rationalization Uses O&D revenue accounting data and
leg capacity information to determine the value of itineraries in the network
The objective is to group itineraries of similar value into buckets or fare classes
Provides a better understanding of network demand flows
Provides improved leg fares
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Y
B
M
Q
$350 - $650
$250 - $550
$150 - $450
$110 - $290
Open
Open
Closed
Closed
$500
$400
$300
$200
Avg Fare Value
Range of Fares
Availability Status
A $450 ‘M’ passenger would get rejected, but a $250 ‘B’ passenger would be accepted. Potential lost revenue because of fare overlap.
RationalizationConcepts – Leg ExampleRationalizationConcepts – Leg Example
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Y
B
M
Q
$530 - $650
$390 - $530
$250 - $388
$110 - $249
$590
$465
$325
$186
Avg Fare Value
Range of Fares
Open
Open
Closed
Closed
Availability Status
RationalizationConcepts – Leg ExampleRationalizationConcepts – Leg Example
A rationalized fare class structure.
A very involved process when all itineraries in a network are considered
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AgendaAgenda
Rationalization Concepts Process Difficulties
Simulation Results Summary and Questions
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Data InputData Input
RationalizationRationalization
ReviewReviewOutputOutput
RationalizationProcessRationalizationProcess
Leg Fare Input FileLeg Fare Input File
History RealignmentHistory Realignment
Fare RefilingFare Refiling
OptimizationOptimizationNetwork OptimizationNetwork Optimization
Clustering AnalysisClustering Analysis
Peak Season/Non-Peak Season
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RationalizationProcessRationalizationProcess Network Optimization model
Maximizes network revenue Determines leg-compartment displacement costs
Displacement cost is the revenue gain from adding one seat to the leg-compartment
Determines optimal itinerary allocation Calculate each itinerary’s network value
Obtain Desirability Index(DI) for each itinerary Rationalization:
Cluster itineraries into desired fare classes based on the Desirability Index of the itineraries
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RationalizationProcessRationalizationProcess Information provided (O&D, Leg)
Stressed(Bottleneck) legs High Displacement Cost Desirability Index is less than the Fare Demand is greater than capacity
Non-Stressed legs Displacement Cost = 0 Desirability Index is equal to the Fare Capacity is greater than demand
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RationalizationProcessRationalizationProcess Pure Rationalization Results
Peak/Non-Peak seasons Decide DOW; no DOW; Midweek/Weekend
Business Constraints/Requirements Define “New” fare class structure
Alliance compliance
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RationalizationProcessRationalizationProcess Business Requirements
Direct re-mappings Frequent Flier ID/AD – discount fares Child/infant products Group fare class General consideration
Min/Max constraint Same structure constraint Round trip constraint
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RationalizationProcess – Results Carrier A: O&D Market
RationalizationProcess – Results Carrier A: O&D Market
Top revenue producing market Market with greatest uplift
DI Distribution for O&D market with DOM-INTL
0
5,000
10,000
15,000
20,000
25,000
30,000
1 2 3 4 5 6 7 8* 9* 10*New Fare Class
Up
lift
/Pas
sen
ger
s
-100
-50
0
50
100
150
200
DI
Uplift DI
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RationalizationProcess – Results Carrier A: O&D Market
RationalizationProcess – Results Carrier A: O&D Market
Fare Distribution by Old Fare Class for DOM-INTL
0
10,000
20,000
30,000
40,000
50,000
60,000
1 2 3 4 5 6 7 8 9 10Old Fare Class
Up
lift
/Pas
sen
ger
s
0
50
100
150
200
250
300
Far
e
Uplift Fare Fare Distribution by New Fare Class for DOM-INTL
0
10,000
20,000
30,000
40,000
50,000
60,000
1 2 3 4 5 6 7 8* 9* 10*New Fare Class
Up
lift
/Pas
sen
ger
s
0
50
100
150
200
250
300
Far
e
Uplift Fare
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RationalizationProcess – Results Carrier B: O&D Market
RationalizationProcess – Results Carrier B: O&D Market
Market is approximately in the middle in terms of revenue and/or uplift
DI Distribution by New Fare Class for DOM-INTL
0
1,250
2,500
3,750
5,000
1 2 3 4 5 6 7 8 9New Fare Class
Up
lift
/Pas
eng
ers
0
100
200
300
400
DI
Uplift DI
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RationalizationProcess – Results Carrier B: O&D Market
RationalizationProcess – Results Carrier B: O&D MarketFare Distribution by Old Fare Class for DOM-INTL
0
1,600
3,200
4,800
6,400
8,000
1 2 3 4 5 6 7 8 9 10 11Old Fare Class
Up
lift
/Pas
sen
ger
s
0
100
200
300
400
500
Far
e
Uplift Fare Fare Distribution by New Fare Class for DOM-INTL
0
1,600
3,200
4,800
6,400
8,000
1 2 3 4 5 6 7 8 9New Fare Class
Up
lift
/Pas
sen
ger
s
0
100
200
300
400
500
Far
e
Uplift Fare
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RationalizationProcessRationalizationProcess Leg Fare Input file
Populate leg fare class fares
History Realignment File Realign the historical demand to the new
structure
Fare Re-filing File Provides the details to re-file a fare
product
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AgendaAgenda
Rationalization Concepts Process Difficulties Encountered
Simulation Results Summary and Questions
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RationalizationDifficulties EncounteredRationalizationDifficulties Encountered
Data Critical issue
Deciding on the business constraints Iterative process
Handling strange business constraints Considerable degrees of freedom in the
rationalization process Implementation
Getting all departments on board
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AgendaAgenda
Rationalization Concepts Process Difficulties Encountered
Simulation Results Summary and Questions
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Simulations Simulations
Simulation Environment Based on rationalization input data provided Entire Network, not just connections to the hub Generated 30 booking request streams based on
client data Used 10 booking request streams to get average ODIF
demand forecasts Used 20 booking request streams to test revenue
improvements Tested Old fare class structure with EMSRb Compare revenue performance over No RM control
(FCFS)
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SimulationResults – EMSRb ControlSimulationResults – EMSRb Control
Client# Old Fare
Classes
Old Fare Class Structure Load
Factor
# New Fare Classes
New Fare Class Structure Load
Factor
Revenue % Improvement of Rationalized/EMSRb
versus EMSRb only
Carrier A 8 86 12 87 1.1
Carrier B 12 79 16 78 1.5
Carrier C 16 79 14 78 1.8
Carrier D 13 76 9 76 2.7
Average improvement by
Carrier1.8
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AgendaAgenda
Rationalization Concepts Process Difficulties Encountered
Simulation Results Summary and Questions
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Summary and Questions Summary and Questions
Rationalization is the process of: determining the network value of itineraries grouping similar network valued itineraries into a
pre-defined fareclass hierarchy Rationalized Fare Class Structure provides:
Segmentation of fare products into the fare classes Ability to protect for the higher valued products Minimized fare overlap of fare classes
Revenue Simulations indicate a real benefit The End
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The End.The End.