Airline Revenue Management Strategy, Business model and Implantation, a Case Study Analysis of Kuwait Airways
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Fierce competition became eminent in the airline industry from the time when this industry became deregulated in the year 1978. In fact, the fierce competition has made each airway to strive towards achieving competitive edge within the global markets.
To realize this, most airways, including the Kuwait airways, have resorted to use cutting-edge optimization techniques including feasible business models and revenue management strategies. The Kuwait airways together with other airlines, see revenue management as a decisive way of maximizing profitability and capacity usage.
These airlines accomplish revenue management strategy through proper management of the demand and supply, which is ensured via price management.
Therefore, to accomplish the research aims and objectives, this study will be both qualitative and quantitative. Various statistical techniques will be used to analyze the gathered primary and secondary research data.
Factors such as clients’ arrival rates, probability that a client will reject or accept the Kuwait airways ticket, the pricing of tickets, the booking periods as well as the itineraries used by the Kuwait airways will be examined to respond to the stipulated research questions.
As a matter of fact, researches relating to revenue management and business models have progressed to include ticket pricing techniques and inventory control. However, given the complexity involved in such techniques and the numerous assumptions made, it has become very difficult to apply them in real-life situations.
Thus, to investigate the Kuwait airways revenue management strategies, business models and their implementation, a different research model which incorporates relevant pricing techniques, clients’ arrival rate, the probability that clients will accept the tickets and clients behaviours will be examined in this particular research. Finally, both the dynamic and static pricing will be studied.
In the recent years, the airline industry has emerged to be very competitive. The total numbers of airlines that operate within Kuwait have tremendously increased. This emerged to be the case ever since the airline industry became deregulated in the fiscal 1978.
The deregulation of this industry permitted airlines to decide on their particular routes, select their specific market segments besides setting their own flight fares provided they comply with the laid down aviation authority regulations.
However, the intense competitions within the airline industry have made various airlines to resort to progressive optimization methods that might assist in the development of decision support systems which would ensure adequate control and management of airline operations.
The most imperative aspect that the airline industry considers to be of great significance is revenue maximization from the sale of aircraft seats. This is what has been termed as revenue management.
Initially dubbed as yield management, most industries have successfully implemented revenue management strategies in the recent years to spearhead their competitive advantage. The industries include rental cars, hotels, amusement parks, trucking, cruise lines, utilities, amongst others.
As a business practice, revenue management enables corporations to increase their revenues through matching the available products and prices to the total market demands. Thus, revenue maximization is the basic revenue management principle which is achieved by controlling the pricing and inventory levels of the perishable products.
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Other than maximizing revenue, airline revenue management gives airlines the opportunity to operate several fares that are charged effectively. This, in turn, enhances such airlines attractiveness to the clients or consumers.
Statement of the problem
Kuwait airways constitute of different aircraft that operate in different networks with a combination of numerous destinations and origins. There are stopovers and direct flights amid the diverse routes that Kuwait airlines use.
The generated revenues from the sale of aircraft tickets in each flight coach class within the followed networks ought to be maximized. Every passenger might demand the flight coach class reservations based on their favoured itineraries.
Each moment customers’ requests for reservations, the Kuwait airways are obliged to confirm if the seats are available in that particular route. In case the seats are available, the Kuwait airways offer the charged fares to the travellers who then decide on whether to reject or accept the stated fare.
Clients’ arrival tends to follow a process where the charged flight rates vary over time. Nevertheless, the Kuwait airways objectively aim at maximizing the revenues generated through selling seats over the whole airline network.
Furthermore, policies that need to be followed when selling the stopover and directs flight tickets for the set destinations must be developed. Therefore, Kuwait airways seem to have implemented various revenue management strategies and business models to ensure that it maintains the level of its competitiveness in the global markets.
The research study objectives will include;
- To investigate the revenue management strategy for Kuwait airways
- To examine the Kuwait airways business model that ensures effective revenue management
- To examine how business models and revenue management strategies are achieved
- To recommend to the Kuwait airways management new business models and technological advancements that may enhance the level of their market competitiveness
What are the key questions the project attempts to answer?
When this research study is concluded, the obtained outcomes should respond to the following questions;
- What revenue management strategies do the Kuwait airlines currently use to maximize on the generated revenues?
- What impacts do the implemented business models have on Kuwait airlines revenue maximization strategies?
- How do Kuwait airlines implement both the business models and revenue management strategies to ensure that maximum revenue is generated?
- What policy measures and recommendations should the Kuwait airlines management develop and implement to ensure they maintain the level of their market competitiveness?
Why are you interested in the project?
Various researches have been conducted on the international airways as regards to their revenue management strategies as well as the implementation of the adopted business models. However, the Kuwait airways have received minimal attention if any with respect to these factors.
This research intends to investigate the revenue management strategies and business models that Kuwait airways use and how they are implemented. The project is of great essence since literature in the field of revenue management strategies, business model assumed by the airline industry and their implementation have left a gap in this particular case study area.
Evaluation of the available revenue management strategies, business models and their implementation will be the basis for offering recommendations. The evaluation will help in establishing the relationship between the three aspects being observed and the impacts they have in the attainment of the Kuwait airways revenue and business goals, missions and visions.
Consequently, the study will examine the Kuwait airways business models and revenue management strategies to establish the essentially needed improvements.
Even though studies that have been carried out in the past primarily focused on revenue management strategies and their importance to various industries, the relationship between these strategies, business models and their implementations have not been appropriately explored.
Thus, the importance of this study lies on the fact that any shortcomings that Kuwait airlines face in its revenue management strategies, business models and their implementation needs to be studied and recommendations offered to enhance the company’s global market competitive advantage.
The Kuwait airlines management will benefit from this study since important sectors that require specific improvement may be identified through this study. Additionally, strategies and business models that account for the changing Kuwait airlines market environment may also be established.
The study will identify factors that may facilitate the development of suitable revenue management strategies, business models and their implementation as a way of improving the Kuwait airlines organizational performance.
Business models and strategies
The airline revenue management has over the years transformed from the simple-leg control systems to the network or origin-destination control system through segment control system. Also, the airline revenue management has been faced with problems which are distinctively divided into two namely the discount or seat allocations and the ticket pricing.
These problems define the type of business model and the revenue management strategies being applied by the airlines (Bertsimas 2005, p.304). In revenue management, both the single-leg control and network control strategies have continuously been applied till today in the airline industry.
Discount or Seat Allocation
Also called the seat inventory control strategy, the seat or discount allocation is the optimal determination of booking limits for the fare class seats whereby the maximization of total revenue is highly prioritized. Both the single-leg and the network control approaches have been used in this strategy.
When applying the single-leg control approach, the flight legs are separately optimized. On the other hand, all the flight legs, including direct flights connecting pair of cities are simultaneously optimized using the network inventory control strategy.
Therefore, to optimize the total revenue for the entire airline network, the network revenue management will have to handle the sale of the airline ticket to the passengers considered local as well as those considered connecting passengers (Al-Watan 2011, p.3).
In almost all major airlines such as Kuwait, the aircraft seats are categorized into economy and executive classes. The economy classes have comparatively low fares as compared executive classes which relatively have higher fares.
Nevertheless, considering the economy section of the aircraft, all seats will not be priced identically though looked at physically they are identical. The result is different fare classes. The major issue is the number of tickets to be sold within each class to dissimilar passengers (CAPA 2011, p.1).
The assumption of the seat inventory strategy is that the prices for each fare classes will be allocated depending on certain predetermined criteria. Moreover, for the airline to maximize its total revenue, only the seat allocation needs are determined.
The nested reservation system is normally being applied in determining the booking limits for the fare classes (Bertsimas 2005, p.306). In this system, the fair class inventory is structured in such a way that high fare request will not be denied so long as there are available seats remaining in the lower fare classes.
However, the nested-reservation system is only binding in limited capacity where the lower fare classes are reserved when the higher fare classes are fully booked (Airline Leader 2011, p.9). The booking limit is the highest number of seats for a fare class that can be sold.
For instance, where the airline considers a nested reservation system for a three-fare class, then the maximum booking for the highest fare-class is going to be the total cabin capacity. The subsequent fare-class will be having maximum booking equivalent to the total cabin capacity less the seats that is reserved for the higher fare-class.
Through the application of the nested reservation system, the airline will have to ensure that the demands for higher fare class are for all time accepted so long as there is availability of seats in the cabin.
In this system difference that occurs between the compulsory maximum value of seats in the immediate lower class and the required maximum seats of the higher fare class is known as the reservation level of the higher fare classes from the lower fare classes.
Though it will always be attractive for the airline to able to sell many highest fair class tickets as possible, this would not be beneficial especially by raising the number of seats since some few seats within the highest fare class may remain un-booked or vacant hence raising no revenue (Bertsimas 2005, p.308).
Therefore, the major objective of the airline will be to allocate seats for every fare class in such a way that the seat mix sold in the aircraft has maximum revenue generation.
The airline will not accept only the reservations for the number of seats available rather it will sell more seats than it’s capacity (Al-Watan 2011, p.3). The reason is that it will risk departing with seats unoccupied because of cancellations or as a result of absenteeism. Therefore the airline will always thrive to book beyond its capacity (Kuwait Airways 2011, p.5).
However, there will be a risk of having ticket-holding passengers. But such passengers will be rebooked on later flights. Though there will be compensation and loss of goodwill as well as the bumping cost when there is overbooking, in most cases the fixed percentage will be used as the overbooking factor.
In ticket pricing, the differential pricing will be used in determining prices of each class tickets in such a way that the revenue is maximized. This will majorly depend on the airline internal structures or the marginal costs and the market reactions.
Differential pricing is whereby different seats will be sold at different prices not necessarily according to classes. In other words, even within a class seat price differentiation will be applied.
As already been mentioned, the ticket profit maximization prices will primarily depend on the market side or demand and the supply side (Bertsimas 2005, p.311). The demand or the market side is the relative perceived value of the seat and the willingness of the passengers as well as his ability to buy the seat.
The sales volume will comprise of the number of seats bought at various seat class levels. When the sales volume is combined with prices, the result represents the total revenue that the airline will generate (Kuwait Airways 2011, p.21).
The sales volume and price relationship mirror the ordinary demand curve principles. However, the relationship between prices and sales volume can considerably vary within or between the markets. This will make the critical pricing decisions be more difficult (Airline Leader 2011, p.11).
Due to the ever-changing airline business environment, the demand for the seats may either increase or decrease. Increases in demand normally result from the internal organizational strategies such as offering promotional fares and good marketing campaigns. However, low demand may be driven by external factors such as low prices being offered by the competing airlines (Kuwait Airways 2011, p.1).
Since 1970s the yield or revenue management together with its application in the airline industry has been highly emphasized (Wright et al. 2009, p.6). Littlewoods first depicted the basic problem of airline revenue management in his 1972 article.
In that article, Littlewoods introduces the so-called Littlewoods rule stipulating that each seat should only be fulfilled if its revenue surpasses the future anticipated value. This basic rule forms the current basis in which majority of airline control policies both in practice and theory is anchored (Wright et al. 2009, p.6).
The work of Littlewoods has been expanded by various scholars. For instance, the revenue management problem was examined using the fare-restriction combinations by Belobaba in 1989 (Wright et al. 2009, p.6). Also, Glover et al. in 1982 explored the passenger-mix problem within the network environment.
Moreover, you in 1999 looked at the dynamic pricing model while Van Ryzin in 2004 applied the discrete-choice model of demand (Wright et al. 2009, p.6). More literary work in airline revenue management was contributed by the in-depth analysis by McGill and Van Ryzin in 1999. Therefore much of the literature review will surround the works of these scholars.
The seat inventory control
As was stated, the airline revenue management strategies being discussed is majorly divided into seat inventory control system and the ticket pricing system. According to Anjos et al. (2009, p.538), the seat inventory control system involves apportioning limited seat inventory to the existing demand that occurs overtime before the departure of the scheduled flight.
The major objective of this strategy is to get the seats right mix that will maximize the revenue (Belobaba 1987, p.65). The strategy applies either a single leg seat approach or the network inventory control approach.
Single-leg seat inventory control approach is whereby the flight legs are separately optimized (Curry 2001, p.177). For instance, assuming there is a passenger travelling from A to C through B. This passenger offers to pay $1000 for the whole journey.
It is assumed that this passenger pays $600 for the first flight from A to B while the second flight costs him $400. Also, consider the second passenger travelling only from A to B and offers $800 for the journey.
Using the single-leg approach, the second passenger will be considered for the flight leg from A to B since he offers to pay for higher fare that the first passenger and the airline aim to increase its revenue.
At the same time rejecting the offer of the first passenger will make the airline lose an opportunity of creating revenue for the combination of the two flight legs. In case the second leg flight from B to C is not filled up, then it would be profitable to accept the offer of the first passenger.
This clearly indicates the disadvantage of the single-leg inventory control system. To sort out this problem of single-leg, two solution methods have been proposed. They include dynamic and static method solutions (Curry 2001, p.177).
Static solution techniques
Basically, in this type of booking, the date for requesting for reservation is regarded as the only interlude. Also, the booking limit for each booking class is supposed to be set for each booking period (Coughlan 1999, p.1103).
The biggest problem with the static solution method is that it takes into consideration only the bookings that are done at a particular time. However, bookings are normally a continuous process (1999, p.1103). Although this might not be the optimal approach, it has the capacity to handle both huge and compound leg complications.
The first solution method to be used to work out the problem of airline revenue management for the single-flight leg with double fare classes was the Littlewoods rule (Wright et al. 2009, p.6). The idea behind this rule is to equalize the marginal revenue in every fare classes.
The whole idea is to close down the low fare class whenever revenues from the other low fare seats exceed the expected revenue when the same seats are sold at higher prices (Wright et al. 2009, p.7).
The Littlewoods rule was further extended to multiple fare classes and the term expected marginal-seat revenue method was introduced (Cote et al. 2003, p.27). The methods integrate nested protection level.
That is the number of seats that should be sold in each fare class. The only problem with this method is that it does not yield optimal booking limit in situations where two fare classes are being considered (Cote et al. 2003, p.27).
Dynamic solution technique
The technique does not begin the reservation control strategy from the inauguration of the reservation date, but it somewhat sets the reservation bound for each and every reservation classes founded on the fixed reservations throughout the uncut reservation course (Bertsimas 2005, p.309).
The major constraint to the solution method is that it is computationally rigorous. The discrete-time dynamic-programming model has also been considered by some scholars. This is a non-homogenous Poisson process model demand for every fare class (Bertsimas 2005, p.310).
The use of Poisson process results in the Markov model of decision process whereby bookings are considered done at time t except the available capacity. Booking period is subdivided into various decision periods whereby every request constitutes a period (Ryzin 2011, p.7).
The rule is that the booking request is accepted only when the fare goes beyond the predictable cost at time t (Bertsimas 2005, p.315). Numerous seats booking, which is a problem in the airline seat inventory control are also taken into consideration.
The Markov decision process model for airline seat allocation on a single-leg flight with multiple fare classes has also been formulated (Bertsimas 2005, p.309). The model has integrated overbooking, absenteeism and cancellations (Bertsimas 2005, p.309).
Also, the static and the dynamic single leg-seat inventory control model have been interlinked (Ryzin 2011, p.9). The interlinking process indicates that the Markov decision process brings about the two solution approaches as well as formulating an anthology model that gives rise to the dynamic and static models as the special cases (Bitran & Caldentey 2003, p.222).
Network inventory control
The aim of the network seat inventory control strategy is to optimize the complete network of flight legs that is being offered by the airline simultaneously (Bitran & Caldentey 2003, p.215). In other words, the network inventory control strategy considers the whole revenue that the passengers generate from the origin to the final destination.
The stochastic approximation approach has been used to solve the problem of revenue management through the application of reinforcement learning algorithm (Berge & Hopperstad 1993, p.157).
Currently, those managing the airline consider pricing as an element of revenue management strategies (CAPA 2011, p.1). The reason is that the existence of the airline seat differential pricing is the beginning of the revenue management in the airlines and prices are the most significant determinant of the demand behaviour of the passengers (Bitran & Caldentey 2003, p.207).
Also existing is the duality between the seat allocation and price decisions. Therefore prices are viewed as variable that can be manipulated on the continuous basis. Increasing the prices adequately high can cause the shutdown of the booking class (Curry 2001, p.177). Moreover, the availability of numerous booking classes when a booking class is shut down can be taken as changing the structure of prices faced by the passengers.
Dynamic pricing models
Considering revenue management as the dynamic pricing model has been largely attributed to the works of Bertsimas (2005, p.307). To maximize the anticipated airline revenues, the scholar set the prices dynamically in a finite horizon model whereby the demand distribution parameters are not known.
The scholars suggested promising pricing policy known as the one-step-look-ahead-rule in which the tailor expansion series is applied (Ryzin 2011, p.8). The expansion function of the future reward illustrates the tradeoff that is between short-term revenue management as well as future information gains (Bertsimas 2005, p.309).
The optimal dynamic pricing proposes a model that is used in the perishable products having stochastic demand (Wright et al. 2009, p.6). The assumption is on the finite set of allowable prices. In the model, the continuous-time dynamic programming is applied.
The state of the model at each given time is the quantity of items in the inventory, and the decision of the retailer is the selling price. In the model, demand is assumed to be Poisson with a deceasing rate (IDeas 2005, p.7). What the model is trying to substantiate is the perception that the maximum prices are not increasing within the remaining inventory and non-decreasing in the future (Wright et al. 2009, p.6).
What Research Methods do you intend to use?
Research Methodology and Study Design
In order to investigate the Kuwait airways revenue management strategies, business models and their implementations, be both qualitative and quantitative research methods will be applied. In qualitative research methodology, much of the conclusions will be drawn from the literature review. On the other hand, the quantitative method will involve a survey.
The survey will be conducted online targeting the managers of the major Kuwait airlines. More specifically, the survey will target the Kuwait airways management and it will serve as the main source of the research primary data.
The researcher proposes to use deductive reasoning. These research methods are successively considered to be the best given that they rarely stand a chance of disqualifying any notable alternative explanations and they infer to the event causations.
Besides, to critically illustrate the revenue management strategies, business models and their implementations on the success of Kuwait airways as they exist when this study is conducted, the suggested descriptive statistics will accrue from the observations made.
The researcher also proposes to use the specified research methods by taking into consideration crave to acquire relevant first-hand research data and any other related investigated information from the research respondents. It is alleged that this will assist in devising sound and rational study conclusions amid offering feasible recommendations to the research being conducted.
Primary and secondary data sources
In order to present significant research findings, appropriate conclusions and credible recommendations, this investigative study on the Kuwait airlines revenue management strategies, business models and their implementations will use the two well-known research sources namely the primary data source and secondary data source.
However, the primary research information and desired data for this novel study will be obtained through administering self-designed survey questionnaires and conducting in-depth interviews to the study targeted population. In fact, the researcher intends to administer the questionnaires to the study participants in person through choosing each respondent initially incorporated in the study population.
Interview schedules that have already been approved to help gather information on Kuwait airlines revenue management strategies, business models and their implementations will equally be used to establish the management and employees observations on the extent at which the Kuwait airways have dealt with the implementation of business models and revenue management issues.
On the other hand, the secondary research data and information will accrue from various management, business and financial records in addition to any other authenticated generated revenue documentation that have been filed by the Kuwait airways.
A review of the revenue management strategy information, adopted business models and the assumed implementation processes, acceptance and any resistance will be done to obtain secondary information.
Such research information will facilitate the ascertainment of whether the organization in question has any primed revenue management strategy and business models which have been implemented and properly managed to help spearhead the Kuwait airways business and operation success.
Basically, the secondary and primary data which will be gathered will relate to Kuwait airlines seat inventory, customer arrival rate and the ticket pricing or fare structure.
Various revenue maximization strategies data such as the dynamic pricing, network inventory and the static pricing will be used to help answer the research questions. Furthermore, data relating to the clients ticket acceptability or rejection probability will be sought.
The following three models will assist in ascertaining the Kuwait airways revenue management strategies, business models and their implementations.
Pricing strategy: This model will assist to gauge the prices that the Kuwait airways offer, the maximum period the charged prices might take before fluctuating and the booking periods.
Under this strategy, various approaches employed by the Kuwait airlines will be investigated, including the remaining time approach, hybrid approach and the seats remaining approach.
Acceptance probability: This revenue management strategy will help the researcher to ascertain instances when the Kuwait airlines management anticipates whether a client will accept or reject the seat and the offered prices and measures that are undertaken. Three probabilities will be applied in this case, including the probability regarding the offered prices, the remaining time as well as the composite probability.
Client arrival rate: The three clients’ arrival rates namely high, medium and low will be looked at under this strategy. The assumed booking processes will also be examined under this model.
Instrumentation and Data Collection
Data Collection Instruments
Data perceived to contain the relevant research information for this study will be acquired from the primary as well as the secondary sources.
As a case study survey and a study that involves self-administration of research questionnaires, the relevant primary data will be gathered via self-administration of the study questionnaires, conducting structured in-depth interviews to the selected Kuwait airways revenue management and business plan development employees and through observation.
A comprehensive exploration instrument will be developed and satisfactorily tested prior to embarking on the actual Kuwait airlines revenue management strategy, business model and implementation research study. That is, after consultation with the supervisor, a questionnaire will be developed and only the selected and amended items that address the study questions and objectives will be included in the questionnaire.
Data Analysis Method
In order to ensure logical completeness as well as response consistency, the acquired revenue management data, business model information and their implementation will be edited by the researcher each day to be able to identify the ensuing data gaps or any mistakes that need instant rectification.
When data editing is completed, the collected research information will be analyzed qualitatively and quantitatively.
For example, any data that will have been collected through in-depth interviews and secondary sources such as the generated revenue, customers’ arrival rate, airline networks and business models like the static pricing and dynamic pricing models will be analyzed using content analysis along with the logical analysis techniques (Spector 2006, p.223).
Moreover, from the obtained research data, the correlation that exists between study variables, namely revenue management strategies, business models and their implementation success or failure will be gauged.
Further quantitative data analysis techniques, including percentages, the acceptance or rejection probability and deviations will be used to determine the research respondents’ proportions. The method will be applied for each group of items available in the questionnaire that ideally corresponds to the formulated research question and objectives.
Line graphs, tables as well as statistical charts will be used to make sure that quantitative data analysis is simply comprehensible (Spector 2006, p.224). Of great essence will be the development of a research model that constitutes all the study factors such as the client arrival rate, pricing strategies, ticket acceptance probability and the used airline itineraries.
Needed assurances and clearances
Given that this research is essential to the completion of my study, a formal authorization request will be sought from the Kuwait airways management where the survey will be conducted. The researcher will take all the responsibilities encountered during the research process to ensure the integrity, dignity and well-being of the involved study subjects.
To make certain the completion of the research tasks within the required time-frame, the researcher will recognize and effectively balance any subjectivity by providing precise research accounts and abiding by the law to develop the indispensable expertise.
Considerations and observance will thus be given to a variety of ethical issues as well as guidelines, namely the participants informed consents, power and confidentiality (Aguinis & Henle, 2002).
The Kuwait Airways employees will be granted a holistic indulgent into the study through seeking for every research participant’s permission to ensure abidance by their respective informed consent. A request for the participants understanding to be involved in the research will also be made clear.
For instance, time factor, the significance of the topic researched on, activities to be undertaken, and any risk to be encountered will be revealed to the research respondents or participants. The participants will be free to make independent decisions of whether to take part or not to be involved in the research.
This implies that the participants will be informed by the researcher of their indefinite voluntary participation in the study before taking part (Aguinis & Henle, 2002). Further, the researcher will ensure that the participants are aware of the research details and nature and their respective rights to pull out from the study any moment.
Honesty will be observed by the researcher and the participants will not be compelled to take part in this research. To ensure that the participants are not laid up while participating in the research, the Kuwait airlines management permission will be sought and the unwilling participants will be exempted from the study.
In fact, the participants’ information will not be disclosed to guarantee confidentiality and to preserve their anonymity (Aguinis & Henle, 2002). The information acquired from the study participants will be securely stored and protected, whereas study finding reports will not divulge the participants’ identification.
Aguinis, H & Henle, CA 2002, Ethics in research: Handbook of research methods in industrial and organizational psychology, Blackwell Publishers, Inc, Malden, MA.
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