Emerging Trends in Cruise Ferry Revenue Management

Revenue Management has been in existence for many decades now with airlines being the pioneer when it comes to using scientific approaches to maximize revenues on departures. However in the recent past, there has been a growing realization in the cruise ferry domain about the tremendous positive impact that automated revenue management systems can have on the bottom line and some of the exciting new developments that have become prevalent in the airline industry are becoming even more relevant to cruise ferry operators as they strive to leverage every opportunity to boost revenues in a complex and challenging marketplace. This article outlines some of the existing new capabilities that can significantly boost revenues for cruise ferry operators.

Price Sensitive Revenue Management

Traditional revenue management principles that came into existence decades ago rely on the premise that fare products are differentiated by restrictions (for e.g.: advance purchase, roundtrip, cancellation penalties, minimum/maximum stay,etc.) and that demand for each fare product is typically independent of other fare products owing to the price fences. However a growing number of companies, starting primarily with airlines, but more recently in the cruise ferry industry have adopted a simplified fare structure wherein all fare products have similar or no fare restrictions. Employing traditional revenue management methodologies in a price sensitive environment will lead to significant revenue dilution due to the ‘spiral’ down effect since all passengers would naturally gravitate to the lowest available fare with no restriction based incentives to force upselling. Relying on traditional techniques could result in disastrous consequences as the sailing may potentially go out full but with most of the bookings in the discount classes. An allocation based approach wherein demand for each product is considered to be independent and is based solely on historically observed bookings in each product will result in inaccurate demand forecasts and consequently adversely impact the bottom line. In order to effectively handle this challenge, sophisticated price sensitive models that forecast demand as a function of price have been developed. By using the concept of price elasticity and determining the likelihood that passengers would be willing to upsell to the next higher fare, these models recommend optimal allocations that minimize dilution. The modeling is based on the premise that the total traditional demand at the resource level (typically cabins, passengers, vehicles or freight) remains the same in a price sensitive environment. However the distribution of this demand among the different types of product in the resource is determined using the price demand relationship which takes into account the willingness of a booking to upsell using price elasticity curves. Even in a predominantly restriction free environment, it is quite likely that some product types have restrictions and these models are designed to handle these hybrid scenarios that include product and price sensitive products. As simplified fares become more prevalent in the cruise ferry industry, the need for automated RM systems to support these capabilities will also increase. Studies have shown that using Price Sensitive RM can result in revenue improvements of upto 2%.

Competitive Insight

Historically, cruise ferries have just relied on their own booking data to generate forecasts and subsequent optimization controls without taking into account competitor actions. However there is a growing realization in the industry that passenger booking behavior is influenced by competitor actions in markets where there is a choice. Getting visibility into competitor actions on a regular basis and factoring that in setting inventory levels is imperative for a cruise ferry to retain passengers as well as positively impact the bottom line. Though most cruise ferries employ some form of competitive insight through manual processes, automated processes to monitor competitor activity and influence inventory decisions have been the exception rather than the rule. Studies have also revealed that using competitor price as the sole criteria in making inventory decisions typically results in revenue reduction in the long run and so inventory levels need to be adjusted not just based on competitor fares but also characteristics associated with the cruise ferry including seasonal loads, customer loyalty, sailing times, etc. Automated revenue management systems that can consume competitor data from third party vendors on a regular basis, identify the optimal competitor based on user and system based matching logic and present the results to analysts so as to enable them to make informed decisions can greatly reduce analyst workload while eliminating human error. As awareness increases in the cruise ferry industry about the importance of factoring in real time competitor actions in the decision making process, the need for automated revenue management systems that take into account market conditions and enable analysts make informed decisions is on the rise.