Pricing & Revenue Management Blog

Top 7 airline industry challenges: Rio 2016 Olympics

Aug 2, 2016 2:20:51 PM
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Challenges For The Airline Industry

Market dynamics around large sport events like the Olympics test yield management and advanced predictive analytics of the airline industry.

In an ordinary day, airline pricing and yield management are a dynamic, competitive chess game for airline revenue managers. Now, imagine a major event that gathers people from around the world, which completely changes the dynamics of the market and flight demand patterns.

One is about to begin: the 2016 Olympics in Rio de Janeiro, putting to the test the entire airline industry for several reasons.

1. Flights to Rio could almost triple

According to statistics from the Rio Times, the number of international flights to Rio de Janeiro between July 25th and August 21, 2016, has increased 289 percent compared to the same period in the previous year.

In numbers:

  • 500,000 foreign tourists are expected just for the event.
  • There are 45,400 trips scheduled.
  • There is a 13% growth in online travel sales.
  • The total scheduled international seats to Rio de Janeiro is up by 19%.
  • Total flight bookings to Rio are ahead by 148% due to the Olympics.
  • Total flight bookings to Rio are ahead by 23% due to the Paralympics.

 Source: Statistics gathered by eRevMax, Frontier Magazine, Reuters

What Challenges Is the Airline Industry Facing?

Source: Forward Data SL

2.  South American travelers will rise to the top

Short and mid haul flights from South America - especially Chile and Argentina- will increase online travel revenue by 45%, and scheduled seats by 31%.

 Challenges for the aviation industry

Source: Forward Data SL

3. Predictive analytics will be put to the test

The Olympic Games or the World Cup trigger an entire machinery to secure a streamlined, and optimal flight system, including bookings, fares, and yields.

According to Trudie Ann Atherton and Trevor Atherton from the University of New South Wales - who took lessons from the Sydney 2000 Olympics- there are several problems tourists face in these scenarios, such as overbooking in transport or accommodation, and overcrowding. The combination of these two, in the end, can turn into delays.

“In practice an airline carrier usually has no guarantee of a sale until all passengers have presented themselves for boarding. This is compounded by late cancellations or ‘no shows’. Equally, passengers have no guarantee of a seat and may be denied boarding up to the point when their reservation is confirmed.”

4. Game theory and market dynamics at its best

All in all, yield management in these cases are an entire game of probabilities. Why? Because there are hardly any benchmarks to run advanced predictive analytics. Every 4 years, the venues are different, the teams and participants who qualify change at all times. Most importantly, winners who stay and losers who go home change by the minute and even the millisecond.

Brazil is no stranger to this predicament. They hosted the 2014 World Cup, where the dynamics of air travel were very unpredictable.

There were record short-haul bookings for domestic flights around Brazil to watch the final game in Rio’s Maracanã Stadium. The big surprise was that Brazil didn’t qualify for the final after all, but Germany. Long-haul supporters replaced Short-haul fans.

And it’s not just about bookings and seats. Fare rules can turn ghastly when, at the last minute, passengers need to extend or reduce the number of days at a venue, depending on their team’s performance. Hence, the pricing goes up, and customer satisfaction goes down.

5. Don’t forget your frequent passenger

With this level of demand segmentation, prices go up to the roof and, while serving a particular type of customer (the Olympics traveler) with tight fare rules and regulations, airlines can end up overlooking some of their frequent passengers.

When the Olympics end, what’s next?

According to ForwardKeys,  “Rio will be facing a weak performance after the Olympics and Paralympics from the long-haul markets: forward bookings for total international arrivals between 29 September and end of the year are down 13% but bookings from Latin American markets are still up 24% thanks to the supporting Argentina and Chile.”

So don’t take your customers for granted. Sheryl E. Kimes, professor of operations management at the School of Hotel Administration (SHA) calls this Perceived Fairness. That is, “when customers believe that a company is behaving in an unfair fashion that they are unlikely to patronize that firm in the future”, demonstrated in customer reaction to high prices after a disaster or large sporting events.

6. Slim profits?

Despite the number of flights and heavy logistical machinery, when cutting corners, servicing the Olympics could not be a great business. According to IATA, Brazil is one of the most expensive places in the world for fuel, as it accounts for 40% if costs, versus the 30% global average. Taxes, on the other hand, are on the roof: Sao Paulo, for instance, taxes fuel for domestic flights at 25%.

To add up to this predicament, the small profit is greatly influenced by:

  • Unbalanced routes

When the games start, all flights with inbound direction to the event get filled very quickly, and the airlines can increase their fares in such flights. However, flights in the opposite, outbound direction are quite empty. The depressed load factors of outbound flights usually hurt airline profits more than what the better fares of inbound flights can compensate. The same scenarios occur on inbound flights when the games end and extend to sub-events during the games such as an important game or the finals.

  •  Agencies buying in advance

Usually, for these types of events, travel agencies try to book flights with more than eight months in advance to prepare the all-inclusive packages (flight + accommodation + tickets)  and access to better prices. If the airline doesn't have a clear pricing strategy for agencies, it might lose a significant part of the potential revenues to other airlines that do have a clear proposal for the agencies.

7. Worldwide flight hubs will come to the rescue

Over 20% of athletes originate from the Asia Pacific region. However, there is no direct flight capacity to Rio. The top five transit hubs for travelers will be Dubai, Santiago, New York, Sao Paulo and Frankfurt.

It is one of the reasons why LATAM, Latin America’s largest carrier, plans to add up to 300 additional flights just to service these games, investing over $5.6 million dollars in the operation, as it projects to transport approximately 25 percent of those traveling by plane to Rio de Janeiro for the games.

 

What is your experience with yield management in large sporting events?

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Tags: Airline Pricing
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