Revenue Managers: Now is the Time to Rise Up and Conquer the Challenges Ahead
I’ve seen Revenue Management help create stability during two Gulf Wars, 9/11, and the biggest recession since the Great Depression (along with SARS, MERS and Avian Flu).
Still, I’ve never seen the catastrophic and complete disruption to the travel industry brought on by the coronavirus outbreak. In his inspiring video message to Marriott Associates, CEO Arne Sorenson reported that, in previous crises, bookings had dropped 40% at most. This COVID-19 crisis has caused a 90% decrease in Marriott’s bookings. Sorenson is determined that they will survive.
In addition to precious lives, the coronavirus pandemic is putting millions of jobs are at stake as well as the survival of many iconic brands in travel and transportation.
We are individually and collectively stunned by current events. In times of uncertainty, we look for assurance.
My friend Dave Roberts is fond of quoting something Mark Twain probably never said: “History doesn’t repeat—but it rhymes.” I interpret that to mean, even if current circumstances are unique, there are lessons to be learned from the past.
Those of us who are skilled in Revenue Management are in a tremendous position to help our companies get though these uncertain times. We have the data, the tools and the mindset to navigate through the crisis and to aid in recovery.
As Revenue Managers, we are comfortable dealing with uncertainty. Even in normal times, we never have a completely accurate view of the future. We must ingest all the data we can get, analyze it, draw conclusions, and make decisions. Astute Revenue Managers know that every decision we make is transitory. It is merely the best decision at the time based on the facts available. As we get new information, we are comfortable with drawing new conclusions and revising our decisions. Course corrections are a part of our lives. These skills are our strengths in chaotic times.
I will share a few stories about how Revenue Management and Revenue Managers have not only faced incredible economic turmoil, but have overcome it. I hope these stories will give you comfort as well as energize you to rise to this current challenge and conquer the undertaking ahead.
Revenue Management Originated in an Airline Crisis
Revenue Management was created out of necessity after airline deregulation. Price wars were literally killing the airlines. Bankruptcies were rampant. Revenue Management saved the industry.
In the early 1980s, the U.S. government deregulated airlines’ routes and fares which had been strictly controlled. Freed from government restrictions, fare wars commenced. By 1982, there was an average of one airline bankruptcy per month!
In 1983, Delta was losing the current equivalent of $600 million per year. Its future was at stake. I was practicing law in Delta’s Law Department at the time. I had successfully handled a couple of high-profile cases, so CEO David Garrett engineered my move into Marketing. I thought it was a bizarre move. I was a lawyer. My undergrad degree was Chemistry. I had trained as a pilot in the U.S. Air Force. I had no experience in Marketing. I had never taken a course in Marketing, or even in business for that matter!
I started walking the halls of Delta with my yellow legal pad in hand. I eventually entered a room of 50 people who were in the basement of the reservations building. The room was called “Reservations Control.”
The fare wars had created a crazy assortment of a dozen fares that would be available for sale on any particular flight. The fares might range from $49 to $499 on any given flight. The people in Reservations Control were responsible for determining how many seats of each fare would be available on each flight. Analysts allocated the discounts based on their personal experience and their gut feeling of how many seats could be sold at each fare on each flight based on historical demand in the market. The analysts were bright and energetic. They understood that more discounts needed to be offered on low-demand flights. They also knew that, on high-demand flights, the number of discount seats available should be restricted—thus saving seats—for high-yield passengers who typically booked late.
What bothered me after spending time with them was the enormity of their task. Delta had 1,500 flights per day. These analysts were responsible for all the flights being sold in the coming year—550,000 flights per year. Fifty people managing 550,000 flights? Each person was responsible for 11,000 flights? No wonder we were losing money!
These analysts had a greater impact—on a day in, day out basis—than the CEO or anyone else in the organization. If they made too few discounts available, we lost out on sales. If they made too many discounts available, high-yield passengers were turned away.
The fare wars were filling planes, but we were losing money. I did a quick, back-of-the-envelope calculation. If Delta sold just one unnecessary deep discount seat on each daily scheduled flight, that represented $52 million in lost revenue over the year!
I pulled together a small team. It was comprised of some analysts who were manually allocating the fares and some IT resources. I included a PhD in Mathematics from Georgia Tech who was working at Delta’s Jet Base forecasting engine failure rates. I told them “You’ve got to help us figure a way out of this mess!”
As they were working on a computer support system, I made some process changes. The flights had been passed from person to person based on how close it was to departure time. I changed that. I gave each analyst full responsibility for their flights from the time they went live in the reservation system to the time the flight doors closed and the revenue on board was set.
We created a computer system to give the analysts an automated decision-support tool. By current standards, the system was rudimentary. It was mostly a “smart filter” that prioritized the flights which the analysts should focus on. The breakthrough achievement at the time was that the system could monitor all 550,000 future flights each night and prioritize the ones which needed analyst attention the next day. This had never been done before. It was the first “Yield Management” system.
It was an immediate success. It had a $900 million (measured in current dollars) impact its first year. It was part of an amazing turnaround story.
Other airlines were working on the same problem. Before long, virtually all U.S. airlines adopted Yield Management, the predecessor to Revenue Management. Instead of continued chaos, Revenue Management helped make airline deregulation a success—a win/win for passengers and airlines alike. Steven Morrison and Clifford Winston concluded that that lower fares and better service as a result of deregulation netted travelers some $6 billion in annual benefits, while airline earnings increased by $2.5 billion a year by 1986.
Revenue Management and the Gulf War
The first Persian Gulf War presented the next great challenge to travel and transportation.
Austrian Airlines was a mid-market European airline which was an early adopter of Revenue Management. CEO Dr. Herbert Bammer had embraced Revenue Management before deregulation hit the European skies. In 1990, the airline had invested in people, process, and systems in order to gain a competitive edge in preparing for the onslaught of airline deregulation in Europe. But another event overtook the industry.
On January 17, 1991, President George H. W. Bush initiated coalition effort Operation Desert Storm to dislodge Saddam Hussein’s Iraqi troops from Kuwait.
The airlines saw the cost of jet fuel, which had been 60 cents a gallon before the invasion, soar to $1.40 a gallon. Trans-Atlantic traffic dropped 50 percent. People were afraid to fly. Airline losses peaked at $4.8 billion. The industry took a dramatic hit for over a year.
Austrian Airlines, however, was prepared for the turmoil. Their investment in Revenue Management in its totality—people, process and systems—paid off in an unexpected way. In 1991, when most European airlines profits were down the tubes, Austrian reported robust profits.
“During the Gulf War we were opportunistic,” remembers Michael Stagl, Head of Revenue Management at Austrian Airlines. “When traffic was down, we used our Revenue Management system to look for opportunities. Surprisingly, we were able to find a number of areas of strong demand and capitalize on them.” Austrian Airlines was able to be patient when other airlines were desperately discounting. “We were more selective” Stagl observes about discounting. “We didn’t give away our future.” Revenue Management helped Austrian Airlines keep its string of record profits going, throughout the Gulf War.
September 11, 2001 and the Great Recession of 2008-2009
Few events in history can rival the immediate impact which the coronavirus outbreak has had on travel. The 9/11 terrorist attacks on the United States is one.
In the immediate aftermath of the attacks, the US government grounded the commercial aviation fleet for three days.
The U.S. tourism industry reported a $2 billion loss in the first two weeks after the terrorist act. The severe drop in tourism expenditure resulted in a GDP loss of over $27 billion. During the post-attack period, the 2001—2002 U.S. tourism labor market suffered 335,000 job losses. Every 12th employee in the industry had lost his or her job by the end of 2002.
Immediate declines in airline passenger loads of up to 50% were mirrored by declines in hotel occupancy.
At 10:00 am on the morning of September 11, 2001, Chris Elam, VP Revenue Management at Hyatt Hotels Corporation was pitching a million-dollar upgrade to their Revenue Management system to his senior executive team at Hyatt headquarters in Chicago. The meeting broke with the news of the tragedy. Nonetheless, the upgrade was approved that November. Hyatt recognized that Revenue Management capabilities were essential to their recovery.
After the initial shock of the attack, in Atlanta, Craig Eister and his team at InterContinental Hotels Group shifted focus quickly to understand the responsiveness of guests to price. At the time, IHG had 4,500 hotels in over 100 countries. They knew that travel would be inhibited for some time. They were aware that many people would not travel, even by offering the kind of desperation hotel rates that many of their competitors were offering. IHG wanted to understand “how low to go” to stimulate demand, without diluting the revenue from those who would travel anyway.
In addition, the growth of the internet and wide-spread on-line “rate shopping” made it easy for customers to comparison shop. These factors forced a critical investigation into the price sensitivity of potential customers so that “optimal prices” could be determined in a rapidly changing, chaotic marketplace.
Revenue Analytics was engaged to partner in the design, development, and deployment of a price optimization module for IHG’s Revenue Management system. The new module generated 40 million price-sensitive forecasts per night, and it optimized price for all 4,500 hotels. The system generated $400 million in additional revenue per year for IHG hotels even during the financial recession of 2008-2009.
The system was a finalist for the prestigious Franz Edelman Award. The award recognizes the most outstanding and impactful examples of operations research, management science, and advanced analytics practice in the world.
A Call to Action for Revenue Managers
The New York Times has reported what most of us know: the American economy is facing a plunge into uncharted waters. There is little doubt that the nation is headed into a recession of uncertain proportions because of the coronavirus pandemic. It is impossible to foresee the bottom and how long it will take to climb back.
We are already seeing desperation pricing in hotels. In San Francisco, hotel managers were fruitlessly aggressive in cutting room rates in hopes of luring new business. Luxury hotels slashed their daily rate for corporate reservations by 35% to $302. In Manhattan, hotel rooms that in previous years at this time would go for $200 to $300 a night could be had for as little as $60, according to The Wall Street Journal.
We have not seen the bottom. The World Travel & Tourism Council sees up to 50 million tourism jobs at risk.
Any recovery will be slow and uneven. There will be no V-shaped economic recovery from the coronavirus outbreak. No one knows how long this outbreak could last, and we could even see a second wave of infections after the first is under control.
A $2 trillion stimulus package will help, but that package will create its own dislocations in the recovery effort.
This is the Time for Revenue Managers to Rise Up.
No grand strategic vision will assure recovery. Economic and financial recovery will be uncertain and spotty. It will happen at the micro-market level. Suburban Cincinnati could recover fast while the Bronx lags—or vice-versa. Some neighborhoods in L.A. will recover faster than others. The stimulus package will create disparate opportunities among market segments.
Bankruptcies will abound. Stronger players will acquire the weaker players. Success in the uncertain post-COVID-19 recovery will go to the quick and the nimble.
Revenue Managers are poised to adapt. We have access to the most granular data sets of anyone in our organizations. We can see every purchase of every product in every location. We can track movement in all our micro-markets in near real-time. The most sophisticated of our Revenue Management systems have dynamic views of customer demand, inventory, and competitive actions. We have the assistance of autonomous agents to help us understand where we can move with speed to capture the opportunities which appear and fleetingly disappear.
Our advanced Revenue Management systems can provide robust analytics of different indicators from different sources. Our machine-learning algorithms can identify and predict customer demand patterns and spot directional changes and inflection points at micro-market levels from the bottom-up. These critical, momentary opportunities will be missed by the ordinary aggregated, top-down views used by others in the organization.
Moreover, we have the experience to interpret what we see. We have the inquisitiveness to explore what we can’t see. History is on our side. We have the data, tools, and mindsets to overcome the coronavirus economic challenge.
Selling the right product to the right customer at the right time has never been more important.
This is our time. Let’s Roll!