Wall Street Journal: Achieving Long-Term Analytical Advantage

June 18, 2013- 

By Thomas H. Davenport

Airlines have always been my poster children for resting on their analytical laurels. They pioneered many of the analytical applications that are now widely used in business: loyalty programs, operations research for flight, crew, and maintenance scheduling and revenue management. The last of these—revenue management, or price optimization for airplane seats—has been particularly useful for airlines, and is credited with saving American Airlines Inc.’s bacon when it was competing with People Express in the 1980s.

But now other airlines have all these capabilities. If there is an airline without revenue management, I’m not aware of it (unless it was Borneo Airways, which went out of business in 1999—probably because it lacked revenue management capabilities). Other analytical applications such as loyalty management and crew scheduling are similarly common in the industry.

Part of the issue with competitive advantage is that airlines get help from other firms. American itself—in the form of American Airlines Decision Technologies—consulted to many other airlines for years. I’m not sure why the airline decided to spread the analytical wealth, but doing so certainly inhibited the potential for advantage. In revenue management, many airlines use software from PROS Inc., a company whose founders came out of the airline industry in 1985.

So with every airline already having revenue management software, and much of it coming from the same vendor for over a quarter century, it seems unlikely that any particular airline would be getting competitive advantage from their revenue management system, correct?

That’s not entirely true, it turns out. Granted, most airlines don’t get much advantage from revenue management, but apparently some do. The PROS people told me I should talk with Karl Isler, the revenue management guru at Swiss International Airlines Ltd., and I did. I also spoke with Gregory Aretakis, an airline industry veteran who is head of (among other functions) revenue management at Frontier Airlines, a U.S. discount carrier based in Denver. Both airlines have managed to eke out advantages from their revenue management prowess in a couple of different ways.

Swiss has been able to achieve substantial gains in revenue and margins with its revenue management system, particularly in European markets where the absence of code sharing and alliance relationships allows more pricing flexibility. The airline’s success in revenue management derives from two capabilities it developed beginning in 2003. First, it combined the two organizational processes that make up revenue management—pricing and capacity management—into one integrated process. The company brought all relevant pricing aspects into its revenue management algorithm. Secondly, the company can make fast pricing changes. They enter a new price into an online tool, and it is immediately reflected in the price seen by consumers through all channels. And if Swiss receives a request for a fare from a travel agent or online site, it makes an immediate, real-time decision on what price to charge, and replies with booking availability. The company was the first to employ a PROS module allowing real-time dynamic pricing. In short, Swiss includes more factors in its revenue management equation, and it makes changes more quickly.

Frontier isn’t as high-tech as Swiss, but it has found success in revenue management as well. The company competes in markets with much larger airlines, but has managed to survive and prosper. Mr. Aretakis argues that competitive advantage “is partially the information you have, partially your brain power and your ability to intuit information and partially the ability to understand your competitor.” His group tries to create small niches of pricing advantage for short periods based on its knowledge of competitors’ disinterest. The company establishes new prices for short periods before competitors notice them and respond.

If innovative and fast-moving airlines can secure competitive advantage from revenue management, chances are good that it can be done with other areas of analytics. Who knows—maybe even airline loyalty programs can be the subject of innovation and advantage at this late date in their history. In fact, I’ll describe one that plays that role next week.