Evolving Challenges at Airlines' RM & Pricing Organizations
The last 6 months have been extremely challenging for thousands of companies in most industries. The Travel & Tourism industry has been one of the hardest hit. Focusing on airlines specifically, while things are projected to very slowly improve, depending on the trend modelled (see OAG forecast graph below), deep and wide-spread challenges will continue to defy airlines and all travel professionals.
Due to the current high level of uncertainty, airlines will continue to face significant change management challenges. RM & Pricing departments, sitting at the core of airlines’ business models, have and will continue to confront these challenges head on. The same will apply to other Travel & Tourism verticals (hotels, cruises, etc.).
Many airline customers we speak to are looking for insights and strategic direction regarding change management recommendations. This is because, in tackling these change management challenges, RM & Pricing departments can help their airlines improve their precarious revenue positions. The ultimate objective here is to provide insight and useful food-for-thought to help these organizations’ leaders and analysts in moving forward and closer to a sustainable “New Normal.”
Key Drivers of Change
If your airline’s RM & Pricing organization benefited from professional consulting services in the past, you likely received a detailed assessment and recommendations separated in three general areas; sometimes defined as key drivers of change: People & Organizations, Technology & Tools, and Processes. These areas are completely intertwined, related and inter-dependent. However, analyzing them separately helps understand and differentiate top challenges, their drivers, as well as begin to assess opportunities on how to overcome them.
Although the root cause of this crisis is the sudden and drastic drop or, in some markets, complete loss of customer demand - which generated an unprecedented financial crunch for airlines – the impact of these factors on the above areas vary in terms of degree and timing of impact.
Starting with the area experiencing the most direct and dramatic impact, personnel has and continues to experience devastating effects. Due to the fact that compensation expenses are among the top variable costs at airlines, this area, unfortunately, has and will still evolve with a relatively short lag between bookings (or rather, their limited counts) and the size of RM and Pricing organizations. The trend here is somewhat similar to other operational areas of an airline.
What can be expected?
- Drastic Reductions; Gradual Re-sizing
The airline business, as many other service-oriented industries, is driven by demand. Current and estimated (forecasted) demand, in turn, determine capacity, expressed in various forms (flights, seats, ASMs/ASKs). The number of analysts is a function of markets served and seats (or ASM/ASKs) flown. Analyst counts, in other words, depend on capacity managed. Unfortunately, even at this juncture (taking September numbers), capacity remains low (see OAG’s September seats).
The amount of flights and markets managed will depend on how fast demand returns; and will also be subject to Finance-driven expense targets. Although airlines cannot fire or hire at will or overnight, some airlines may have a relative advantage here; specifically, those enjoying regulation and policies permitting furlough options. But even for these airlines, the challenge is that forecasts for recovery are all over the place, and as uncertain as they have ever been. As a result, the distribution of flights and/or markets among analyst will continue to be an ongoing challenge; and so, the need to constantly re-size and re-organize will test even the best airline leaders.
This challenge has and will continue to test resilience, and the ability to cope with uncertainty at all levels. More often than not, the amount of work will be higher than what analysts can expertly manage, not only due to the constant disconnect between planned capacity and forecasted demand, but also due to many unknown and murky factors (changing government regulation, restrictions, new country or regional outbreaks, etc.).
There are a number of ways to re-distribute work among analysts. Each has its pros and cons, and some are more applicable under certain, additional circumstances. Some airlines do it based on number of passengers; others on revenue; some airlines base it on total number of flights or markets managed; most distribute it based on a combination of the above plus additional factors. In this regard, the general recommendation (absent of a full, focused and customized assessment), is to aim for the “combination” option. More importantly, however, is to apply any of the available options based on an internally understood, well-vetted, and agreed methodology. Unfortunately, what complicates whichever method is chosen, is the next element.
- Changes in roles and responsibilities
For airlines where furlough options are limited, or those that took more drastic measures earlier in the crisis (and will not be able to easily re-hire), another challenge is the re-assignment of and changes in roles & responsibilities. This includes the merging of responsibilities from various roles into a given, comprehensive role. For example, an analyst previously focused on Forecast management will need to become versed on managing Optimization levers. An analyst already versed on both areas, will quickly require coming up-to-speed on Pricing analysis and decision-making. All roles may need to understand availability management. The jump from managing flights to overseeing markets, and vice-versa, will be more common as time passes. This will require constant re-training and new functional training, whether internally driven or selectively sourced from providers.
Changes in leadership
Invariably, reductions-in-force (RIF’s) will also result in some leadership changes. As a result, it will produce shifts to departmental strategic direction.
The inherent change management challenge here is that tactical actions, arising from personnel changes and shifts in strategy, had and will continue to demand analyst adaptability and resilience. It will also require understanding of available tools, regardless of role.
The questions that will be critical for those in decision-making positions to keep in mind going forward are listed below.o Did I manage to keep the more experienced and well-rounded individuals?
o If so, but even if not, may I continue re-assigning new or different roles and responsibilities going forward while still being effective in managing the limited network capacity?
o What are my internal re-training capabilities, and how may these be bolstered?
o When and which specific external, formal training and consulting can I afford in order to leverage new functionalities and revised best practices?
o What is the best way to communicate changes (whether re-orgs, new strategies, revised tactics, etc.) with the least additional disruption and risk of further demoralization?
o What are other airlines doing to keep these challenges in check while managing this crisis?
These questions are high-level recommendations in themselves, but you, as the reader, be the judge.
Technology & Tools
Selection of essential technology by the RM & Pricing department is an unfortunate reality, whether temporary or permanent. Harsh financial pressures have forced airlines to decommission non-essential tools when and where feasible (based on criticality and subject to contractual terms). Selection based on what represents mission-critical has likely been made already. However, this evaluation is likely to continue as the crisis evolves.
Reservations and Distribution tools are obviously critical, and focus should continue to be on keeping (or acquiring) technology that facilitate direct channels and eCommerce. Fare filing tools and Availability Management technologies are also in the “critical list,” most notably essential during the deep of the crisis and going forward in the recovery stages. Regarding specialized RM and pricing systems: optimization modules are essential, since these enable airlines to maximize revenues even from limited traffic flows. And considering optimization largely depends on proper and accurate valuation of the available traffic, fare valuation tools are also part of this critical short list.
In terms of forecasting, as previously shared by my colleague Justin Jander in a prior blog, focus should have been (and will continue to be for a bit longer) on maintaining data integrity. This means paying close attention to data input quality; rather than active, daily management and tuning of forecasts. The objective is to avoid using, for future departure dates, misleading demand data that is not reflective of future, expected (if anything can be expected in these uncertain times) demand patterns.
As demand returns, forecasting technologies and methodologies are designed to produce sensible output as long as the input data has been “kept clean.” General review of and tuning of system parameters – in forecasting, but also optimization and pricing - will also be needed soon enough. The PROS COVID-19 Taskforce has been performing science-based modeling. Using both 3rd party data and airlines own historical and current booking counts, the team is working to help airlines identify signs of passenger recovery, timing, and the characteristics of demand.
The set of questions RM & Pricing leadership need to tackle include:
- Are the tools available today the same that will be needed when demand returns?
- Will the select systems’ parameters and levers be primed for tuning and adjusting in order to achieve revenue-maximizing results as demand returns?
- Is there close enough alignment between those critical tools and the redefined roles & responsibilities,
o With the above in mind, are the analysts and leads in those roles trained and capable of using the selected tools?
- Has the organization been paying close enough attention to maintaining Data Integrity?
o Were options carefully vetted, or do they need to be re-assessed?
o What is the timeframe for removing Censoring?
Driven and strongly impacted by People and Technology, most processes have changed. They had to. They have been updated, adjusted and some even eliminated. This will continue to occur, perhaps to an even larger degree - since process changes normally take longer to be addressed and implemented. These, therefore, will require periodic revisions considering they depend as much on market realities as they rely on the size and shape of the organization and the tools at their disposal. Processes have and will continue to be a recurrent Change Management challenge.
Should RM &Pricing departments throw away prior, established processes and Best Practices documentation? The perhaps obvious answer is NO. But the reasons is of importance here:
- The “New Normal,” will likely be a scaled down version of the prior to 2020 bonanza in the airline business. That is, lower demand and lower industry capacity - whether it is smaller airlines networks or lesser number of airlines; most likely both. As a result, many of the original business scenarios will apply, but fit to a smaller network.
- The vast majority of processes can and should be re-purposed and adjusted to address new current and future market scenarios. The processes to be followed will require adjustments to legacy processes. In the future, driven by market needs and adjusted based on People considerations (size and shape of the organization) as well as surviving (and new) Tools and Technologies.
One good example is the so-called “New Market Entry” scenario. Every airline should have a clearly outlined process and steps on how to effectively accomplish this common business scenario. The process likely includes all analyst roles (in specified region or areas) interacting among each other, with various levels of leadership, and across other departments (i.e. Network Planning, Sales, etc). It should also include the review of key data sets (i.e. OA capacity, pricing, demand flow, etc.); then actioning in various systems, including RM, Inventory/Res, distribution.
The updated, adjusted process would become more of a “Market RE-entry” scenario, whereby processes and steps are revised and, some of them, simplified. They may include only a sub-set of interactions, altered or new data analyses, changes in certain decision-making points, and so on. Re-purposing and updating, based on new realities, new best practices is the better approach; rather than drafting them from scratch.
The RM & Pricing teams will also need to solve for the following challenges swiftly and in parallel to the above topics.
- Ability to closely coordinate with Network Planning. During these times, RM & Pricing should more than ever complement and even validate Network decisions. Those airlines with established processes and good relationships are already ahead of the game. Those airlines who do not, must leverage this crisis as an opportunity to now build a constructive relationship. Few airlines have even gone as far as now consolidating these two organization at the same VP level, which has a number of advantages.
- Constantly adjust its Pricing strategy and resulting tactics. Whether a pricing leader or a follower (strategy of matching OA), or a hybrid of these – likely based on product and fare class differentiation - different strategies will now be based on route, markets and timing of recovery. They will depend more than ever on an interplay of internal (capacity decisions) and external factors (OA capacity, government regulations, etc.).
- Need to constantly monitor and quickly react to new trends. More than even, RM & Pricing teams need to closely follow government regulation, signs of demand recovery (get insight from PROS COVID-19 Taskforce), merge these findings with the airline’s work to track its own booking data, and make internal decisions and help drive airline actions (with Network Planning and other departments).
The last 7 months have likely been the toughest in airline history. They have tested the change management capabilities of RM & Pricing organizations - whether we consider the difficult decisions made by their leaders, or the impact felt by analysts. Unfortunately, change management challenges will continue to be tested. Some airlines were better positioned than others to deal with this crisis. Others are learning fast. While there is no silver bullet for airlines, the key drivers of change must all be evaluated carefully and addressed as inter-dependent areas. Airlines will more than ever need change management champions within, and select assistance from outside, to help tackle these evolving challenges.
To further discussion on any of the above topics, or to provide feedback, please each out to me directly.
About the AuthorMore Content by Javier Palazuelos