October | 2020
Abstract
While both Revenue Management and Dynamic pricing are common practices in the Airline and Hospitality industries, these strategies still remain unexploited in Airports. Transforming from the traditional pricing approach to a more dynamic pricing environment can present opportunities to build a viable commercial strategy, which will not just help to combat the current crisis but also reap benefits in the long run.
The objective of this paper is to explore the use of data-driven pricing strategies by wielding analytics and insights as competitive weapons for improved revenues in Airports. We will explore how digital technology plays a vital role in enabling this vision to optimize yields and profitability for Airport Managers.
Introduction.
Today, the Aviation Industry is tackling numerous pressures and challenges due to COVID-19. Per a recent report published by the IATA (International Air Transport Association), the COVID-19 crisis will see airline passenger revenues drop by $314 billion in 2020, a 55% decline compared to 2019.
While the industry is dealing with multiple pressures due to reduced revenues, airports and airlines are also faced with the task of building back passengers’ confidence in air travel and ensuring their safety to resume air travel. There are guidelines and SOPs laid down by governments and authorities like the IATA and MOCA for resuming domestic and international travel such as ensuring minimum social distance, enabling contactless methods for check-in and boarding, e-payments etc.
The challenge for airports now is to implement these adapted operational concepts while reducing costs to combat this crisis.
Most airports today are therefore making investments in technology solutions to enable a contactless and safe journey for passengers, which is now also considered as ‘The new normal’ in air travel. As this industry is putting in efforts to digitize the Passenger journey, there is also a need to explore the use of technology in the area of back-office operations. Leveraging digital technologies in the area of back office can present multifold opportunities for reducing costs and delivering step change benefits in revenue generation and operational performance of airports.
Airports as a Business Enterprise
In recent years, airports started diversifying revenue sources by using innovative strategies like increasing rental rates, bidding for concessionaires and generating opportunities in other commercial avenues such as parking and retail. This has resulted in a considerable increase in non-aeronautical revenues such that non-aero revenues are now accounting for a high percentage of total revenue. Today, an average of 39.4% of global airports’ revenues are derived from non-aeronautical sources. (Source: 2019 ACI Airport Economics Report).
However, with growing non-aeronautical revenue sources, airports have now become businesses, where they need to look at revenue and cost management strategies to optimize yields and profitability. The challenge faced by most Airport Managers today is that there is limited automation in this area and insufficient insights into the sales data, which can help them develop the right pricing strategies to provide the required growth while coping with the uncertainties in this industry.
Over the years, airlines have built sophisticated algorithms as well as pricing strategies & systems around revenue management; however, demand-led pricing strategies have not been exploited by most Airport Revenue Managers till date.
Pricing Strategies for Effective Revenue Management
Within airports, managing revenue is a little more complicated as airports need to look at multiple aspects to maintain value across all parties.
Let us first understand revenue structures for an airport. The below diagram depicts the classification of aero (air operations related) and non-aero (commercial revenues not directly related to aircraft operations).
While aeronautical revenues are related to airline, passenger, and freight processes, non-aeronautical revenues comprise commercial revenues from sources such as land lease, Duty Free, Retail, Parking fees, and other commercial activities as depicted below.
With passenger numbers dropping significantly due to COVID-19, Airport Managers are now exploring non-passenger revenue sources as well, such as land leases, building theme-based activity arenas for visitors and local residents etc.
Leading Airports like London-Heathrow, Schiphol, and Zurich have already introduced Revenue Management and dynamic pricing models where-in airports are now able to set flexible prices to account for fluctuations in demand and other factors such as length-of-stay, occupancy level of car parks, etc.
A Revenue Manager can apply such demand-led pricing strategies for these non-aeronautical and non-passenger revenue streams and look for ways to gain maximum benefits from them. Listed below are few examples:
Let us look at the simple example of Airport Parking, which forms one of the biggest contributors to Non-Aeronautical revenue (26.8% per ACI Economic Report). Most of the time, passengers prefer to take cabs, public transit etc. due to high everyday-prices costing the airport significant revenue. During off-peak hours, parking spots are idle and highly underutilized. On the other hand, parking slots are full during peak times costing the airports revenue in travelers who are unable to park.
Dynamic pricing can solve this problem of both over- and underutilization of the parking facilities, while driving additional revenue for the airport. Airports can set dynamic prices such that lower prices during off-peak hours can bring customers back into a more profitable per-trip revenue source and during peak-demand times, higher dynamic prices can discourage passengers from bringing their personal vehicle to the airport.
Similar pricing strategies can also be applied to boost aeronautical revenues. Another example is Dublin Airport, the fastest growing airport in Europe for the last eight years, which has replaced all free parking of aircraft with a dynamic, tiered-pricing charge structure in 15-minute blocks. This tiered structure allows Airport Revenue Managers to make price adjustments based on usage.
Dependency on Data
In order to apply such pricing strategies, end-to-end visibility of the performance figures is necessary. Airport Revenue Managers would then be in a better position to negotiate rates with both airlines and concessionaires if they get a detailed understanding of their performance figures.
Data collection and billing for the growing non-aeronautical revenue is not streamlined at most airports today. Due to varied pricing models, there is latency in sales data collection from various sources (rentals, retail, parking, and other concessionaires).
Therefore, there is a need to build a complete sales data view and slice & dice this data to provide a more detailed analytical perspective of revenue share and sales patterns. Using performance-monitoring dashboards, Revenue Managers can get a drill-down view of data covering revenue share across the varied sources based on different factors such as passenger segments, seasonality, business events, etc. Using data analytics, various demand-forecasting models can also be built based on capacity, demand, and other factors for effective revenue planning. The data analytics platform can also be used to provide vital information on capacity utilization. For e.g. how to make use of infrastructure and better utilize it, thus enabling efficient use of resources.
This is essentially a three-step process to first gather data from different sources, apply different advanced data models, and use the same for effective decision-making and strategic planning.
Data Analytics process for Price optimization and to manage inefficiencies
Wipro Ltd. and Airports Practice
At Wipro, we have a dedicated airports practice comprising SMEs who are building innovative solutions to address challenges faced by the industry, based on our experience of working with leading airports across the globe. We deliver end-to-end services for 15+ airports across geographies including leading airports in North America, India, and the Middle East.
We bring industry-leading data science, visualization techniques, and data exploration methods, and build architectural blueprints and data-analytics frameworks for leading organizations across the world. We define an end-to-end plan, roadmap, PoC, and develop an implementable strategy through the adoption of data science to visualize business insights in real time.
Conclusion
Airports need to invest in technology solutions around revenue management to drive cost optimization & revenue enhancement. These solutions need to be highly flexible in modelling various fees based on varied pricing strategies and integrated with data analytics platforms, which can provide Revenue Managers with end-to-end visibility into various performance metrics. This wealth of information can be used to build the right pricing strategies, which can change the way an airport office is run today.
References
Pranjali Bhatia
Managing Consultant, Airports
Pranjali has 15+ years of experience in Business Consulting, Product Management, E-commerce, and Analytics in the Aviation and Travel Industry sector. Currently, she is the Lead Consultant for the Airports cluster in India.
Jasvinder Singh
India Head of Wipro’s Airport, Engineering, and Construction business
Jasvinder Singh has over 20 years of experience helping customers unlock value from their IT investments and drive business transformation strategies. Jasvinder is a respected adviser to Wipro’s Airport industry customers and partners, and a proven P&L leader within the industry. Jasvinder’s experience spans a range of industry sectors including Telecom, Retail, BPO, and Insurance.
In this Knowledge@Wharton whitepaper Arjun Ramaraju, VP and global head, Engineering and Construction Business, Wipro Ltd, discusses the key emerging trends as the E&C companies
Need of the hour is to have infused intelligence for unique passenger experience, improved operational efficiency through automation and informed decision-making Vasuki
As air traffic grows most airports are now poised as "multi-nodal" transportation hubs for people, information and trade. The effort is to make systems and processes digitally aware
Locations
