Dr StrangeloveDr Strangeloveor How I Learned to Stop Worrying or How I Learned to Stop Worrying

and Love the Commodityand Love the Commodity

Dr Strangelove Will Tell You:

Cyberspace Poses a Great Marketing Opportunity: Cyberspace Poses a Great Marketing Opportunity: Do Not Get Left OutDo Not Get Left Out

Airline Engagement Model Destroys the Purity of Airline Engagement Model Destroys the Purity of Our Vital Revenue EssenceOur Vital Revenue Essence

The KEY to Working Together is to Start Valuing The KEY to Working Together is to Start Valuing Something Being Given Away for Free TodaySomething Being Given Away for Free Today

How to Revenue Manage Negotiated ProgramsHow to Revenue Manage Negotiated Programs Hugely Benefits the Airline and Allows Airlines Hugely Benefits the Airline and Allows Airlines

to Profitably Distribute Product in Cyberspace to Profitably Distribute Product in Cyberspace

2001: A CyberSpace Odyssey

Reach Out and Touch PeopleReach Out and Touch People eCommerce could become Primary Method of eCommerce could become Primary Method of

Selling Products in the 21st CenturySelling Products in the 21st Century New ways of Distributing Product, Interacting with New ways of Distributing Product, Interacting with

Customers and Providing ServicesCustomers and Providing Services Let’s focus on Internet Ticket Auction SitesLet’s focus on Internet Ticket Auction Sites

Format is Appealing to the Cost-Conscious Format is Appealing to the Cost-Conscious Well Designed Auction is an Excellent Price Well Designed Auction is an Excellent Price

Discovery ToolDiscovery Tool

Treating Auction Sites as a Negotiated Treating Auction Sites as a Negotiated ProgramProgram

Negotiated Programs are:Negotiated Programs are: Direct Competition to our Revenue Managed Direct Competition to our Revenue Managed

Distribution ChannelsDistribution Channels Threaten Market Segmentation AssumptionsThreaten Market Segmentation Assumptions The Dilution DroogsThe Dilution Droogs

A Clockwork OrangeThe Violence We Do to Ourselves

A Revenue ManagementHorror Story

Demand vs Fare

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Eyes Wide ShutFreud and Your VP of Revenue Management

The KEY is Managing Negotiated ProgramsThe KEY is Managing Negotiated Programs RM has Ignored Negotiated Programs RM has Ignored Negotiated Programs

Shutting our eyes is easier than facing itShutting our eyes is easier than facing it The Problem with Negotiated Programs is the The Problem with Negotiated Programs is the

Establishing a Ticket Price in AdvancedEstablishing a Ticket Price in Advanced That Agreement has Financial ValueThat Agreement has Financial Value

Think CommodityThink Commodity: in the Negotiated : in the Negotiated Agreement you are Agreeing to a Strike Price Agreement you are Agreeing to a Strike Price on a Block of Ticket Commodities.on a Block of Ticket Commodities.

The Agreement is a Financial Instrument!The Agreement is a Financial Instrument! Ticket = Forward ContractTicket = Forward Contract Agreement = Call Option on TicketAgreement = Call Option on Ticket Booking = Call Options on TicketBooking = Call Options on Ticket

Especially if you use Block SpaceEspecially if you use Block Space

SpartacusIt’s a Call Option, Stupid!

LolitaThe Illicit Romance betweenAirlines and Consolidators

Negotiated Agreements are Free OptionsNegotiated Agreements are Free Options This creates This creates Market InefficienciesMarket Inefficiencies The airline shoulders the The airline shoulders the Price RiskPrice Risk

Block Space is Writing a Covered CallBlock Space is Writing a Covered Call without any compensation,without any compensation, the worst of all the worst of all worldsworlds

This drives up Published FaresThis drives up Published Fares

Revenue Management Revisited

Revenue Management is an Inherently Revenue Management is an Inherently Speculative StrategySpeculative Strategy Holding inventory is a Speculative ActivityHolding inventory is a Speculative Activity Suppliers should Hedge against Price Risk to insure Suppliers should Hedge against Price Risk to insure

an acceptable profit an acceptable profit Market Conditions do not Always Warrant a Market Conditions do not Always Warrant a

Speculative StrategySpeculative Strategy Flexibility of Strategies is Important to be able to Flexibility of Strategies is Important to be able to

Effectively Managing Risk Effectively Managing Risk

Financial Follies in Revenue Management

Revenue Management works well where Revenue Management works well where Speculation works wellSpeculation works well Great in High Demand / Business Markets Great in High Demand / Business Markets

where Prices can be Expected to Run Upwhere Prices can be Expected to Run Up Poor Performance in Cost Conscious MarketsPoor Performance in Cost Conscious Markets

A Single Risk Management Mechanism A Single Risk Management Mechanism Limits the Ability of Revenue ManagementLimits the Ability of Revenue Management Need to Contrive Mechanism allowing Hedging Need to Contrive Mechanism allowing Hedging

Full Metal Jacket Managing Negotiated Programs

Negotiated Programs Need a Hedging Negotiated Programs Need a Hedging Strategy which Guards against DilutionStrategy which Guards against Dilution

Charging an Option Premium per Booking Charging an Option Premium per Booking Makes the Agreement Revenue NeutralMakes the Agreement Revenue Neutral

Writing a Covered Call is a HedgeWriting a Covered Call is a Hedge Price Goes Up, Dilution Offset by PremiumPrice Goes Up, Dilution Offset by Premium Price Does Down, Premium covers Lower PricePrice Does Down, Premium covers Lower Price

Better Yet, Buy Put to Insure Lowest PriceBetter Yet, Buy Put to Insure Lowest Price

Pricing the Risk of Dilution

Goal: Achieve Financial NeutralityGoal: Achieve Financial Neutrality Simplest Idea is use Black-Scholes OPMSimplest Idea is use Black-Scholes OPM

Target Ticket Price = $300, Current = $200Target Ticket Price = $300, Current = $200 Volatility of Price = 5%Volatility of Price = 5% T-Bill Rate = 5%T-Bill Rate = 5% Offer Expiration in 100 daysOffer Expiration in 100 days

The Risk of Each Booking is worth $38.16The Risk of Each Booking is worth $38.16 The Premium = $38.16 + Handling ExpenseThe Premium = $38.16 + Handling Expense

The KillingBenefits to Airlines

Protecting against Dilution Stabilizes Protecting against Dilution Stabilizes Expected Revenue Expected Revenue

Hedge shifts Price Risk away from AirlineHedge shifts Price Risk away from Airline Risk Adverse rather than Risk SeekingRisk Adverse rather than Risk Seeking

Better Corporate Financing StrategyBetter Corporate Financing Strategy New Mechanism creates a Revenue New Mechanism creates a Revenue

Management Adaptive to Market ConditionManagement Adaptive to Market Condition Overbookings and DBs are HistoryOverbookings and DBs are History

Paths of GloryApplications to Cyberspace

Using the Option Premium allows Airlines Using the Option Premium allows Airlines to Cede Blocks of Bookings to Internet to Cede Blocks of Bookings to Internet Auction Sites without Risk of DilutionAuction Sites without Risk of Dilution

Internet Sites Partially Cover Premiums by Internet Sites Partially Cover Premiums by Selling Airlines Puts and InformationSelling Airlines Puts and Information

Market Efficiency is IncreasedMarket Efficiency is Increased Creating a Fairer Playing FieldCreating a Fairer Playing Field Lowering Published Fares for ConsumersLowering Published Fares for Consumers