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Today the airline pricing system is a black box to the passenger
April, 03rd 2008
Dynamic pricing is a result of the airline industry evolving to understand the various market segments booking on the flights, as well as improvements in forecasting techniques.


Singapore Airlines (SIA) is one of the vital cogs of the Singapore economy, says Mr Bharath Mahadevan, Manager Southern India, SIA, Chennai. Being a country with no natural resources, Singapore had to position itself as a regional hub to survive, he recounts.

Today, Singapore is a regional financial hub as well as one of the biggest aviation hubs in the region, and the Singapore port handles a large volume of container movements every day. Tourism is also one of the main contributors to the Singapore GDP (gross domestic product). Singapore needed an airline that could turn this hub vision into a reality, reasons Mr Mahadevan, in a recent e-mail interaction with Business Line.

Heading the airlines set-up in southern India, responsible for annual revenues of Rs 160 crore, he defines the strategy for the region in terms of revenue growth and cost structure, and implements plans to achieve this strategy. Among his achievements is the improvement he effected to the profitability of the station while identifying new market segments and inventory management practices which generated incremental revenues to the tune of Rs 18 crore a year.

Starting off with the vision of an aviation hub, Singapore Airlines, with no domestic market, had to carry people from Point A to Point B hubbing in Singapore, continues Mr Mahadevan. The prime route of interest was the carrying of passengers from Europe to Australia, as no aircraft could do the mission non-stop. This created a virtuous cycle of people stopping over in Singapore and contributing to the tourism dollars spent.

Today, Singapore has 10 million tourist visitors every year. The airline itself directly employs over 26,000 people in Singapore, and many more are indirectly employed by this industry.

Positioning Singapore as a financial hub as well as an education and MICE (Meetings, Incentives, Conferences and Exhibitions) hub now requires a strong and reliable airline to back up this vision! he avers.

A major contribution of SIA to the Indian economy, according to Mr Mahadevan, is being the biggest airline operating from the Far East to India, bringing in investors from China, Japan, Korea, the US, Australia and Singapore.

We also transport businessmen from India to these places, making this part of the world much flatter for Indian businessmen, he mentions. SIA also provides the Singapore Airlines - Neptune Orient Lines scholarship for Undergraduate studies in Singapore, and the Singapore Airlines Youth Scholarship after the 10th standard.

Excerpts from the interview:

On what areas of cost do you focus, on a continuing basis?

The bulk of our operating costs worldwide are fuel costs, accounting for almost a third of the total costs.

Hence savings in fuel costs is of prime importance to us, especially with the cost of fuel escalating steadily. Currently we pay three times for fuel compared to what we paid three years ago!

Maintaining and renewing a young fleet of aircraft is the first thing we do to trim costs. The average age of our passenger aircraft is around six years, which is one of the youngest in the world for an airline that has been around for 60 years.

We hedge a certain proportion of our fuel, to help cope with the wild swings in fuel prices. Our technical teams continually focus on the routes that our flights take to reach their destinations, and try and shorten these routes to bring about savings in fuel costs.

We also focus on IT to help bring efficiencies in our processes worldwide, to help cut process time as well as improve efficiencies for every dollar earned.

How have the metrics changed over time?

The prime metric now is value. The metric used to be profitability, but we realised that we have to give value to our shareholders in terms of their investments. Simply put, this is a return on the capital investment.

As far as the local station is concerned, our prime metric is generating revenue. Being a network carrier and selling places like the US, Australia and China, our job is to maximise the revenue uplifted on the flight by carrying the most optimum mix of passengers, both in terms of destination as well as the fares they pay.

To explain this, let me give you an example. Say we have 10 seats on our aircraft, with five passengers wanting to go to Singapore, five to Australia, and five to the US. Id rather keep the seats for the Australia and the US passengers as they give me more revenues than a Singapore passenger. Hence forecasting this demand is of paramount importance, as I could be keeping seats for a passenger who may never book.

Load factor (that is, the number of passengers divided by the number of seats) used to be an important metric, but not anymore, as 100 per cent load factor can be achieved by dumping the fares to Re 1!

There used to be a time when tickets were of a uniform price, but now the pricing is dynamic. What do you foresee as the future practice?

Dynamic pricing is a result of the airline industry evolving to understand the various market segments booking on the flights, as well as improvements in forecasting techniques.

Essentially, as the number of seats goes down on a particular flight due to bookings coming in, the fare for that flight should increase, as there will be someone willing to pay that price. This becomes more complex when youre dealing with a network carrier like SIA, where we sell different destinations out of Chennai (the US, Australia, China, Japan, etc).

Finally, the complexity shoots up even further with different selling stations selling the same routes: for example, Indonesia could have a passenger on the Singapore to Tokyo flight, competing for the same seat as an Indian passenger. Due to different economies, the passenger from Indonesia can pay more for the seat but he may not book till the last moment.

Keeping all this in mind, we need a complex system to forecast the demand based on historical data, and make sure that we maximise the revenues for the company.

Ten years down the road, I expect this system to mature even more, and with the help of technology, come to a stage where the pricing is even more dynamic than today and the passenger really has to bid for a seat.

However, on the other hand, the whole system should be simpler for the passenger to understand. Today the airline pricing system is a black box to the passenger.

You have been avidly involved in IT (information technology) applications, right from your student days. Can you elaborate on the role of IT in a modern airline operation? Also, on the trends over the decades, and what advantages IT has delivered to the airline industry.

IT has helped greatly in improving efficiencies in the airline industry. The backbone of our airline, our reservations system holding the bookings of all the passengers booked on our flights, is our most critical IT system today. But a couple of years ago, we used to do this manually. Forecasting for flights was done manually! Rosters for cabin crew were manual.

Today, IT has helped us improve our distribution network. A travel agent sitting in the remotest corner of the world can look at our inventory and make a booking on our flights at the click of a button. With the electronic ticketing age coming upon us, he can e-mail the ticket to his customer sitting in another corner of the world and that passenger can show up with just a Photo ID. The passenger can get onto our website and make his own booking, select his seat, select his meal and even shop before he flies!

In the revenue-generating departments, IT plays a critical role. Forecasting demand patterns to maximise revenues as discussed earlier would be a thankless job if not for a complex IT system which does it for us. The system uses historical data and historical demand trends, and forecasts a demand trend for each flight in the future.

The system also looks at the fares paid by passengers around the world, and optimises our seat inventory to maximise revenues by taking the passengers who give the maximum revenues for the network.

The system looks at how many passengers no-show on a particular flight and waste seats on that flight which could potentially have been given to someone else, and overbooks the flight accordingly.

Were one of the few industries where the customer can hold on to our seat inventory till he makes up his mind, and he can cancel the booking one day before the flight departs. We have systems that automatically cancel dubious bookings that is, bookings have been made but tickets havent been issued in the stipulated time.

We also have systems that detect duplicate bookings for the same passenger, either on the same flight or on two different flights on the same day, and help us protect inventory. Improved efficiencies in our seat inventory management help us generate more revenue.

Secondly, in the strategic planning departments, management information systems (MIS) today give us information down to the last level of detail, a job which was done manually even five years ago. We can track demand trends for the future and go down to details on the bookings on every single flight: which agent has made the booking, when the booking was made, how does this compare against the same period last year, and so on.

For viability of new routes, we have systems which provide us market intelligence on the potential of launching flights to a new destination, as well as the market potential of existing destinations which we can capitalise on.

Thirdly, IT helps us save costs and improve efficiencies. IT helps us plan our network better, improving aircraft utilisation efficiencies, creating the most efficient crew rosters and thus improving efficiencies in our manpower planning. Earlier, we used to chalk out our aircraft rotation manually, resulting in inefficiencies. Flight routes are now planned by the systems resulting in fuel savings.

In HR (human resources), IT is helping us move towards a paperless office with purely electronic storage. Were looking at empowering the crew on board with IT systems to improve efficiencies in service. IT helps us with our inventory planning in terms of items uplifted on board.

Finally, in terms of customer service, IT helps us identify frequent fliers and their special needs and preferences, and helps us service them better.

Bottom line, therefore, is that IT helps us improve revenues, trim costs, helps in strategic planning as well as customer service.

What macro variables have had major impact on your work in recent times?

SARS was undoubtedly the worst crisis that fell upon the aviation industry. The September 11 attacks as well as the Bali bomb blasts also had an adverse impact.

Suffice is to say that every event, whether minor or major, affects our industry and, therefore, we need to be prepared with a Plan B!


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