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.
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.