Dr StrangeloveDr Strangeloveor How I Learned to Stop Worrying or How I Learned to Stop Worrying
and Love the Commodityand Love the Commodity
Dr Strangelove Will Tell You:
Cyberspace Poses a Great Marketing Opportunity: Cyberspace Poses a Great Marketing Opportunity: Do Not Get Left OutDo Not Get Left Out
Airline Engagement Model Destroys the Purity of Airline Engagement Model Destroys the Purity of Our Vital Revenue EssenceOur Vital Revenue Essence
The KEY to Working Together is to Start Valuing The KEY to Working Together is to Start Valuing Something Being Given Away for Free TodaySomething Being Given Away for Free Today
How to Revenue Manage Negotiated ProgramsHow to Revenue Manage Negotiated Programs Hugely Benefits the Airline and Allows Airlines Hugely Benefits the Airline and Allows Airlines
to Profitably Distribute Product in Cyberspace to Profitably Distribute Product in Cyberspace
2001: A CyberSpace Odyssey
Reach Out and Touch PeopleReach Out and Touch People eCommerce could become Primary Method of eCommerce could become Primary Method of
Selling Products in the 21st CenturySelling Products in the 21st Century New ways of Distributing Product, Interacting with New ways of Distributing Product, Interacting with
Customers and Providing ServicesCustomers and Providing Services Let’s focus on Internet Ticket Auction SitesLet’s focus on Internet Ticket Auction Sites
Format is Appealing to the Cost-Conscious Format is Appealing to the Cost-Conscious Well Designed Auction is an Excellent Price Well Designed Auction is an Excellent Price
Discovery ToolDiscovery Tool
Treating Auction Sites as a Negotiated Treating Auction Sites as a Negotiated ProgramProgram
Negotiated Programs are:Negotiated Programs are: Direct Competition to our Revenue Managed Direct Competition to our Revenue Managed
Distribution ChannelsDistribution Channels Threaten Market Segmentation AssumptionsThreaten Market Segmentation Assumptions The Dilution DroogsThe Dilution Droogs
A Clockwork OrangeThe Violence We Do to Ourselves
A Revenue ManagementHorror Story
Demand vs Fare
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Eyes Wide ShutFreud and Your VP of Revenue Management
The KEY is Managing Negotiated ProgramsThe KEY is Managing Negotiated Programs RM has Ignored Negotiated Programs RM has Ignored Negotiated Programs
Shutting our eyes is easier than facing itShutting our eyes is easier than facing it The Problem with Negotiated Programs is the The Problem with Negotiated Programs is the
Establishing a Ticket Price in AdvancedEstablishing a Ticket Price in Advanced That Agreement has Financial ValueThat Agreement has Financial Value
Think CommodityThink Commodity: in the Negotiated : in the Negotiated Agreement you are Agreeing to a Strike Price Agreement you are Agreeing to a Strike Price on a Block of Ticket Commodities.on a Block of Ticket Commodities.
The Agreement is a Financial Instrument!The Agreement is a Financial Instrument! Ticket = Forward ContractTicket = Forward Contract Agreement = Call Option on TicketAgreement = Call Option on Ticket Booking = Call Options on TicketBooking = Call Options on Ticket
Especially if you use Block SpaceEspecially if you use Block Space
SpartacusIt’s a Call Option, Stupid!
LolitaThe Illicit Romance betweenAirlines and Consolidators
Negotiated Agreements are Free OptionsNegotiated Agreements are Free Options This creates This creates Market InefficienciesMarket Inefficiencies The airline shoulders the The airline shoulders the Price RiskPrice Risk
Block Space is Writing a Covered CallBlock Space is Writing a Covered Call without any compensation,without any compensation, the worst of all the worst of all worldsworlds
This drives up Published FaresThis drives up Published Fares
Revenue Management Revisited
Revenue Management is an Inherently Revenue Management is an Inherently Speculative StrategySpeculative Strategy Holding inventory is a Speculative ActivityHolding inventory is a Speculative Activity Suppliers should Hedge against Price Risk to insure Suppliers should Hedge against Price Risk to insure
an acceptable profit an acceptable profit Market Conditions do not Always Warrant a Market Conditions do not Always Warrant a
Speculative StrategySpeculative Strategy Flexibility of Strategies is Important to be able to Flexibility of Strategies is Important to be able to
Effectively Managing Risk Effectively Managing Risk
Financial Follies in Revenue Management
Revenue Management works well where Revenue Management works well where Speculation works wellSpeculation works well Great in High Demand / Business Markets Great in High Demand / Business Markets
where Prices can be Expected to Run Upwhere Prices can be Expected to Run Up Poor Performance in Cost Conscious MarketsPoor Performance in Cost Conscious Markets
A Single Risk Management Mechanism A Single Risk Management Mechanism Limits the Ability of Revenue ManagementLimits the Ability of Revenue Management Need to Contrive Mechanism allowing Hedging Need to Contrive Mechanism allowing Hedging
Full Metal Jacket Managing Negotiated Programs
Negotiated Programs Need a Hedging Negotiated Programs Need a Hedging Strategy which Guards against DilutionStrategy which Guards against Dilution
Charging an Option Premium per Booking Charging an Option Premium per Booking Makes the Agreement Revenue NeutralMakes the Agreement Revenue Neutral
Writing a Covered Call is a HedgeWriting a Covered Call is a Hedge Price Goes Up, Dilution Offset by PremiumPrice Goes Up, Dilution Offset by Premium Price Does Down, Premium covers Lower PricePrice Does Down, Premium covers Lower Price
Better Yet, Buy Put to Insure Lowest PriceBetter Yet, Buy Put to Insure Lowest Price
Pricing the Risk of Dilution
Goal: Achieve Financial NeutralityGoal: Achieve Financial Neutrality Simplest Idea is use Black-Scholes OPMSimplest Idea is use Black-Scholes OPM
Target Ticket Price = $300, Current = $200Target Ticket Price = $300, Current = $200 Volatility of Price = 5%Volatility of Price = 5% T-Bill Rate = 5%T-Bill Rate = 5% Offer Expiration in 100 daysOffer Expiration in 100 days
The Risk of Each Booking is worth $38.16The Risk of Each Booking is worth $38.16 The Premium = $38.16 + Handling ExpenseThe Premium = $38.16 + Handling Expense
The KillingBenefits to Airlines
Protecting against Dilution Stabilizes Protecting against Dilution Stabilizes Expected Revenue Expected Revenue
Hedge shifts Price Risk away from AirlineHedge shifts Price Risk away from Airline Risk Adverse rather than Risk SeekingRisk Adverse rather than Risk Seeking
Better Corporate Financing StrategyBetter Corporate Financing Strategy New Mechanism creates a Revenue New Mechanism creates a Revenue
Management Adaptive to Market ConditionManagement Adaptive to Market Condition Overbookings and DBs are HistoryOverbookings and DBs are History
Paths of GloryApplications to Cyberspace
Using the Option Premium allows Airlines Using the Option Premium allows Airlines to Cede Blocks of Bookings to Internet to Cede Blocks of Bookings to Internet Auction Sites without Risk of DilutionAuction Sites without Risk of Dilution
Internet Sites Partially Cover Premiums by Internet Sites Partially Cover Premiums by Selling Airlines Puts and InformationSelling Airlines Puts and Information
Market Efficiency is IncreasedMarket Efficiency is Increased Creating a Fairer Playing FieldCreating a Fairer Playing Field Lowering Published Fares for ConsumersLowering Published Fares for Consumers