Pennies from heaven: as airlines work to cut losses, tech companies pitch products to maximize revenue.

Few industries have it as tough as the airline industry. High oil prices are sending jet fuel prices soaring. Adding insult to injury, the sector still feels the effects of the Sept. 11 terrorist attacks. Carriers have to cut as many costs as possible, so labor disputes grab headlines these days and food onboard--once a perk of air travel--is now sold separately.

Many carriers have recently lost money, and those in the black operate on thin margins. For a US$400 billion industry, that's sad and surprising. For years, airlines have been working hard to control costs. Yet maximizing revenue was a different story.

Historical data can show how full or how empty a plane flying a certain route on a certain day of the year might be, Based on that data, an airline could raise or lower the price of seats. Often, however, that's not enough. Carriers now need to know exactly who the traveler is, where he's coming from and where he's going to calculate prices. Such information was often deleted from old software systems, leaving the airline analyst to play a guessing game, Today, big carriers are prioritizing software to better gauge where their money's coming from.

"We have in our revenue management group probably 200 people and that's all they do, is look at the data," says Pete Garcia, vice president for Latin America at Continental Airlines. Continental has invested millions of dollars into revenue management, along with other tech-driven programs such as online check-ins and interline travel, which lets a traveler use an e-ticket purchased from one carrier to travel on another. These strategies--all technology heavy--are designed to increase the flow of money into the company. "Interline business is big business for us--selling on other airlines is big business," Garcia says. "We're focused very much on that."

Passengers opting to fly on one carrier one way and return on another normally make changes based on factors such as times of departure, Garcia says. Allowing passengers to switch to competitors, carriers also gain the opportunity to attract new passengers from those competitors, which can generate fresh cash flows. Airlines also charge fees for interline customers looking to switch for convenience.

Aside from studying seasonal demand for air traffic, airline analysts study different types of passengers and their spending patterns. "Leisure [travelers] tend to book out much further in advance because they go and buy their hotel package and everything, whereas the business guy is a little bit sooner," says Garcia. For Latin America, the company has analysts focusing not only on different types of travelers, but also on different markets. Mexico has its own team at Continental, as travel patterns and holidays differ from a Southern Cone market, like Argentina.

Revenue management has been good to the airline. For the last 10 years, Continental's Latin American business has grown an average 10% a year, Garcia says. Perhaps that's why Continental has rerouted more aircraft to international markets, including Latin America. The rise of low-cost carriers in the United States has put pricing pressure on older, traditional big carriers, as the new, no-frills companies have hundreds of airplanes on order just waiting to serve the U.S. domestic market. During the third quarter of 2005, Continental reported that the bulk of its passenger revenue came from domestic U.S. travelers, yet the U.S. market performed worse than Latin American, Pacific and transatlantic routes, when measured by whether flights were living up to their revenue potential. Labor costs, too, in markets such as Latin America are cheaper than in the United States, making international expansion even more attractive to big carriers.

Airlines measure their revenue by examining an industry metric known as revenue per available seat mile (or kilometer), and they also share each other's data to determine which is getting the most out of a seat, and to try to compete. Such disclosure does not take away from an airline's competitive advantage since price is not the sole factor in buying an airline ticket, says Garcia. Cheap fares don't make up, for instance, for constant delays. Many big carriers may have the financial backing to develop their revenue models and develop algorithms--fancy mathematical models run by computers--in house, as Continental does.

Geek squads. Not all airlines can afford in-house geek squads, but there are plenty of companies that provide similar services for a fee. For these tech companies, outdated or weak revenue-management software has brought in business.

"Legacy airlines know their unit costs but guess at unit revenues" says Ronald Peri, CEO and Chairman of Radixx International, which provides ticket-pricing software for airlines. Relying on basic historical data may give an airline an indication as to how many people it can expect to make reservations, but it won't tell the carrier how much it could collect. Radixx makes software that takes historical data as well as real-time passenger information--departure and arrival data, whether the traveler is on business, leisure or both--and recommends pricing strategies, such as whether to raise or lower the number of discounted seats available on an airplane. It also collects money more quickly from travel agencies and other distributors.

For some, the service is a lifesaver. Air Iceland, for instance, has historically lost money. Using traditional revenue management systems, it often waited three months after a ticket was sold to collect money from a travel agent, Peri says. Many times, per-seat revenue failed to match expectations. Peri says his company's applications streamlined the payment processes between the carrier and travel agents, eliminating revenue-sapping middlemen.

According to Peri, Air Iceland turned its first profit when it installed a revenue-management system. Since employees no longer have to physically go to collect money owed from travel agents, they were freed up for more money-making endeavors, he says. "Any business needs to know two things, what their unit costs are and unit revenue and in that way they can determine unit profitability," Peri says.

For the carriers themselves, technology is becoming vital to operations, Gunter Kuchler, head of systems at Germany's Lufthansa Airlines, told participants at a December conference hosted by Latin American airline association AITAL. Whether a carrier is global and operating a complex revenue model or a straightforward low-cost carrier, it needs to know the source of its income, Kuchler said.

Online travel sites such as Orbitz or Expedia, travel agencies and a carrier's own Web site are just a few of the many channels one can use to buy a plane ticket. Whatever the source, it's up to the airline to control its cash flow, he said. "Managing distribution means you take full advantage of all channels," Kuchler said. Information technology "systems have to give control over distribution channels back to the airlines," he said.

For leaner, younger, low-cost carriers, revenue management is also important for keeping the balance sheet healthy. Brazilian low-cost carrier Gol's payment options, for example, tend to maximize revenue, too. The company recently unveiled its "Fly Easy" program, allowing customers to pay for airplane tickets in monthly installments for up to 36 months.

The new program was the 12th such payment plan the company had available at press time. "If 2% of our revenues come through this mechanism, that would be great," says Gol Chief Financial Officer Richard Lark, who says the load factor--an industry metric that shows how full an airplane is with paying passengers--could also climb by 2%.

According to Lark, 8 million people travel by air in Brazil, although Gol estimates as many as 50 million Brazilians could afford to travel, quite a potential market. While many airlines tout the need for Internet access to bring those people into the air, Gol's managers feel online buyers are only a small piece of the pie, and that a wide variety of payment plans would be more effective. "Thirty million are online but 6 million have credit cards," says Lark, pointing out that the huge success of the Brazilian consumer goods industry--think household appliances--was the result of retailers offering a wide array of purchasing options.

Perishable. Gol has factored Fly Easy purchases into its revenue-pricing model, a system that 14 analysts oversee. While allowing customers to make monthly payments cuts into cash flow, managers argue that the option puts people on its airplanes that would otherwise never travel by air. In the airline business, seats are very perishable, Lark says. Once the door closes, empty seats stay that way, no matter if the carrier is a low-cost or traditional.

Revenue management has meant new business, even for suppliers to the airline industry. With low-cost and legacy carriers making the most out of their revenue, airline manufacturers are happy to sell more planes, especially as the overall travel market improves from 2001. European manufacturer Airbus had a record year in 2005 in terms of Latin American sales, with confirmed commitments for 71 planes at press time, bringing in an estimated $3.55 billion, says Bafael Alonso, Airbus vice president for Latin America and the Caribbean.

The rise of low-cost carriers in Latin America has fueled demand. For a struggling carrier, Airbus negotiates with flexibility. Aircraft models can be changed during negotiations. For example, TACA, a Central American airline, told Airbus that it needed larger aircraft after it had signed a contract but before deliveries were made. The carrier had added new routes after agreeing to buy mid-sized models from Airbus. The manufacturer accepted the request. Furthermore, planes are designed to allow pilots who fly one model to easily switch to another model, which also helps control costs. "We cannot help on a day-to-day basis, but we can help for many years to come;' Alonso says.

Technology provider Navitaire, like Radixx, develops revenue-management software and other systems for airlines. Low-cost carriers have become top customers, say Navitaire managers. That's because the company's products cater to the simplified pricing structures typical of a low-cost carrier. Navitaire systems give carriers actual price recommendations, says Barbara Vega, a company product manager. (Radixx does not.) Navitaire believes in-house mathematicians are an anachronism for airline companies; instead, they should outsource, she says. "Carriers are investing less in PhDs to be on staff and are purchasing the science;' says Vega. "They are investing more on the business side--the MBAs."