Revenue in Flight Profitability
The majority of revenue for an airline is generated onboard the aircraft. Or said in a more obvious way, airlines don’t make a lot of money when planes are grounded. There are of course exceptions with the two most impactful being – co-brand revenue and third-party businesses like Delta TechOps.
Consequently, in the spectrum of complexity for a Flight Profitability System, the revenue section is relatively straightforward. And no, I am not trying to belittle the efforts of my many commercial friends. It’s just much easier to process revenue in the Flight Profitability System. The commercial organization is oriented to thinking about and measuring performance based on flights, markets, entities, etc. revenues and so have their systems architected that way. This of course is very different from how costs are organized in the general ledger.
That being said, there are three areas of revenue that are a little more complicated and require some more introspection:
1. Proration
Revenue proration or allocating ticket revenue across the segments in a connecting itinerary can significantly impact the profitability of a particular market.
For example: A ticket from SAT to ORD to LHR may be priced at $1,500. How one chooses to spread that $1,500 between the two legs would impact each flight’s profitability which in turn would impact the corresponding market and entity performance.
2. Beyond Revenue (i.e., Upline or Downline)
The value of the network is greater than the sum of its individual parts. The more spokes in the network, the greater the number of potential origins and destinations (O&Ds) that can be created. Consequently, it’s critical to consider the value that each flight provides to the network beyond just the leg that it operated in.
In a Hub and Spoke model, airlines aggregate demand from smaller spokes to their hubs and then connect those passengers onward to other destinations. In the previous example, the SAT to ORD flight supplies passengers for the LHR flight. Similarly, those same passengers would not be on the SAT flight if it wasn’t for the LHR flight. Consequently, when deciding whether or not to cancel either flight, one must consider the value of connecting passengers to the broader network i.e., the revenue beyond that leg or the beyond revenue of both flights.
In the example above, the network value can be directly attributable to each flight and therefore easier to calculate. However, there are also parts of the network that indirectly drive revenues. Some refer to this phenomenon as the “halo effect” and just like other ethereal things is rarely seen in Flight Profitability Systems.
Consider the investment banker who must have transcontinental service. Without this particular market, the investment bank is unlikely to sign up for a corporate contract which means the airline could lose out on all the bank’s corporate travel.
Similarly, there exists the loyalty member who earns miles solely so he/she can redeem them for a family vacation in Hawaii. Hawaii consequently generates revenues for all the other flights that this particular loyalty member travels on. Side note: there’s a bit of an organic redistribution of revenue that happens here with deferred revenue accounting but not worth getting into now.
3. Co-brand Revenue
Co-brand revenue is the revenue that airlines get from their banking partners on credit cards that they market together (hence the name!). Banks buy miles from airlines when co-brand customers spend on their credit cards. A portion of this revenue is recognized immediately but is not associated with individual flights. It is up to the Flight Profitability team to best determine how to allocate this revenue across the network.
That’s it for revenue (for now) and in the next post, we’ll start working through the cost section.
