Revenue Management in the Age of Artificial Intelligence (eBook)

Towards Ethical and Responsible Price Management in Air Transport, Tourism and Hospitality

Sourou Meatchi (Autor)

eBook Download: EPUB

2025
319 Seiten
Wiley-Iste (Verlag)
978-1-394-40174-1 (ISBN)

Infos

Today, Revenue Management is a key practice in the air transport, tourism and hotel industries. Originally known as Yield Management, Revenue Management has gradually evolved into an integral revenue optimization strategy for businesses characterized by capacity constraints and fluctuating demand.

Revenue Management in the Age of Artificial Intelligence explores, through numerous case studies and concrete examples, the principles, models and applications of Revenue Management, while addressing the ethical challenges and prospects offered by digital technology and artificial intelligence. This book is aimed at professionals, students, researchers and anyone wishing to understand the dynamics of price management in a constantly changing economic environment. It highlights the importance of transparency and fairness in maintaining consumer confidence, while demonstrating that Revenue Management is much more than a simple pricing technique: it is an essential strategic tool for many service companies.

Sourou Meatchi is Senior Lecturer in Management Sciences at the University of Angers, within the ESTHUA National Institute of Tourism, France. As a member of the Economics and Management Research Laboratory (GRANEM), his scientific research focuses on Revenue Management, the digital transformation of VSEs and SMEs, and the economics of tourism in emerging countries.

Textauszug

1
What is Revenue Management?

1.1. Introduction

Capacity-constrained service companies (airlines, hotels, ski resorts, theme parks, etc.) are generally characterized by high fixed costs (e.g. maintenance costs for an aircraft, hotel, cruise ship and ski resort) and lower variable costs (Capiez 2003). These companies offer perishable assets and non-stockable products. Demand is generally highly fluctuating. It can vary greatly from one period to the next, from one day to the next and even from one hour to the next on the same day. A hotel may turn away customers on certain days (demand outstripping supply) and be short of customers on other days (supply outstripping demand). In addition, a hotel’s sales located in a seaside town can vary by as much as double depending on the season (high season vs. low season). The occupancy rate for a train varies significantly from one day of the week to the next and even from one hour to the next. Faced with these constraints, it is difficult to apply a rigid pricing system, as is the case in the industrial and trade sectors for tangible goods. However, owing to the freedom of pricing set out in current legislation (Box 1.1), Revenue Management offers solutions enabling service companies such as airlines and hotels to cope with the specific constraints of their business sector. Revenue Management provides effective tools for adapting services and prices to demand and other parameters, such as competition, events and weather.

In the tourism sector, for example, a hotel may rent out its rooms at higher rates during periods of high demand to optimize inventory and revenue. During off-peak periods, the hotel can offer lower prices to stimulate demand. The practice of Revenue Management is therefore a crucial issue for businesses with high fixed costs, limited capacity and irregular clientele. The introduction of Revenue Management has enabled many companies to substantially increase their revenues. According to an article in the Wall Street Journal, the adoption of Revenue Management enabled Continental Airlines to increase its profits by between $50 and $100 million in the 2000s.

Box 1.1. Extract from article L. 410-2 of the French Commercial Code

Except in cases where the law provides otherwise, the prices of goods and services governed by French Ordinance no. 45–1483 of June 30, 1945, prior to January 1, 1987, are freely determined by competition.

However, in sectors or areas where price competition is limited either because of monopoly situations or lasting supply difficulties or because of legislative or regulatory provisions, a decree by Conseil d’Etat1 may regulate prices after consultation with the French Competition Authority.

1.2. Origins and evolution of the discipline: from Yield Management to Revenue Management

According to Kimes and Wirtz (2015), the beginnings of Revenue Management can be traced back to the 1950s, with Beckmann’s (1958b) work in econometrics on the problem of airline seat reservations. For Capiez (2003), the first research work contributing to the emergence of Yield Management and then Revenue Management can be attributed to Rothstein, who, in 1971, proposed the first model of overbooking in air transport. Through his model, which is based on a Markov decision process, Rothstein was able to demonstrate how airlines could practice “overbooking” to anticipate the risk of “no-shows”, that is, people not showing up for check-in on the day of the flight. However, Revenue Management, as we know it today, was born out of the deregulation of air transport in the United States in 1978 (Box 1.2). After the U.S. air transport market was opened up to competition, new airlines were created, making competition much more intense. Against this backdrop, major airlines such as American Airlines sought to optimize all their management levers, with a particular focus on financial revenues, as productivity gains were limited by cost rigidity (Daudel et al. 1994). The term “revenue”, initially used to designate the revenue per mile of an available seat, is at the origin of the concept of Revenue Management. American Airlines pioneered the Yield Management strategy in the mid-1980s to optimize its marginal revenue through a flexible pricing system (Cross 1998)2. Yield Management enabled American Airlines to cope with the competition from charter airlines, which developed after the deregulation of the American air market. This technique also enabled the company to increase its revenues by $1.4 million over three years (Wirtz et al. 2003). The results achieved by American Airlines prompted other major airlines to follow suit and adopt Yield Management. Over time, this practice has been gradually enriched with new levers, enabling service companies to further increase their revenues. The terminology changed from Yield Management (unit Revenue Management) to Revenue Management, which encompasses Yield Management and other strategic levers, such as distribution, group management and itineraries (origin–destination), forecasting and performance control (Weatherford and Bodily 1992a; Noone et al. 2011). The transition from Yield Management to Revenue Management has been marked by the integration of technology and advanced data analysis, enabling a more dynamic and accurate approach to pricing. Revenue Management is based on demand segmentation and real-time tariff modulation with the aim of allocating the best service to the best customer at the best price at the best time (Kimes 1994). It is highly advantageous for service companies, as it constitutes a fundamental weapon for optimizing the company’s overall profit (Camus et al. 2014). Recognizing the benefits of Revenue Management for airlines, other business sectors (rail transport, hotel chains, etc.) have opened up this fine management method. The practice of Revenue Management is now on the rise, suggesting that this technique will become widespread in service companies in general and in the tourism, travel and hotel industry in particular.

Box 1.2. Air transport deregulation in the United States in 1978

The Airline Deregulation Act of 1978 represents a major turning point in the history of the U.S. airline industry, bringing to an end decades of strict regulation that had been in place since the 1930s. Prior to this law, the airline market was under the control of the Civil Aeronautics Board (CAB), a government agency that regulated fares, air routes and entry requirements for airlines. While this regulation ensured a certain level of stability and security in the sector, it severely limited competition and hampered innovation (Levine 1987).

The passing of the Airline Deregulation Act under President Jimmy Carter’s administration gradually removed these controls, liberalizing the air transport market (Morrison and Winston 1986). This deregulation enabled the entry of new airlines, notably low-cost carriers, which intensified competition in the industry. As a result, ticket prices fell, making air travel more accessible to the general public and stimulating significant market expansion (Borenstein 1992).

Increased competition has also catalyzed the emergence of Revenue Management. This Revenue Management model, made possible by advanced data analysis, has become standard industry practice for maximizing profitability (Phillips 2005c).

Thus, the Airline Deregulation Act not only transformed the U.S. airline industry into a more competitive and dynamic market, but also stimulated innovation in Revenue Management, permanently changing the way airlines operate (Talluri and van Ryzin 2004).

1.3. Distinction between Revenue Management, Yield Management and pricing

According to Talluri and van Ryzin (2004), Revenue Management can be defined as a management practice using a systematic approach to optimize overall revenue. This is achieved by setting prices and managing product availability based on demand behavior and customers’ willingness to pay a given price. According to Ng et al. (2017), despite the clarity of this definition, there is still no consensus on the meaning of the term Revenue Management. Numerous other definitions exist in the literature: Weatherford and Bodily (1992a), for example, limit the meaning of Revenue Management to techniques used to determine how much inventory to make available to customers based on times in a day or days in a week. Other researchers (e.g. Kimes et al. 1999; Ng et al. 2008) adopt broader definitions of Revenue Management, including overbooking, forecasting, length-of-stay and itinerary management, customer-specific product customization and commercial risk management. Notably, there is considerable ambiguity between the terms “Yield Management” and “Revenue Management”, on the one hand, and between “Revenue Management” and the term “pricing”, on the other hand. An analysis of the literature on these different concepts (Yield Management, Revenue Management and pricing) and surveys of professionals have led to the definitions discussed below.

1.3.1. Yield Management

Yield Management is a component and lever of Revenue Management. The aim is to manage unit revenues by optimizing capacity allocation by fare class. In other words,...

Produkt-Details

• Erscheint lt. Verlag: 20.8.2025
• Reihe/Serie: ISTE Invoiced
• Sprache: englisch
• Themenwelt: Mathematik / Informatik ► Informatik ► Theorie / Studium
• Schlagworte: Air Transport • Artificial Intelligence • Digital technology • hotel industries • price management • Revenue Management • Tourism
• ISBN-10: 1-394-40174-4 / 1394401744
• ISBN-13: 978-1-394-40174-1 / 9781394401741