Southwest seeks better forecasting with new revenue management system

Washington DC
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Southwest Airlines is replacing its "segment-based" revenue management system with one that better manages demand for origin-and-destination, also called "O&D", traffic.

"The new O&D-based demand forecasting system will allow revenue management to more accurately forecast demand on both the nonstop and connecting levels," the airline tells Flightglobal in a statement. "This more accurate forecast creates additional opportunities to capture revenue."

The announcement was first made by Southwest's chief executive Gary Kelly during the airline's second quarter earnings call on 25 July.

"We are trying to change from a segment-based revenue management system to an O&D revenue management system with the understanding that [this will] dramatically complicated the predictability of the revenue," says Kelly.

The term O&D refers to a customer's entire journey, from a departure airport to a final destination airport, excluding a connecting point. Segments are single flights.

Southwest has traditionally been a point-to-point carrier, but has increased its connecting traffic as it has grown.

Some airline analysts have noted that more than 40% of Southwest's customers who travel to and from cities like Denver and Chicago Midway change planes.

The airline took delivery of the new system recently, but implementation has been delayed due primarily to the complexity of Southwest's route map, which includes many more possible connecting points than the route maps of traditional legacy carriers, which tend to have a handful of busy hubs, executives say.

Kelly says performance of the technology has not initially been "what we want or need."

The system has two pieces, says Robert Jordan, Southwest's executive vice president and chief commercial officer and president of subsidiary AirTran Airways.

One piece, a new forecasting tool intended to provide better predications of travel demand, is providing good data as expected, says Jordan.

But the other piece, which is intended help Southwest manage its inventory buckets for O&D travel, is off track, according to Kelly.

"That piece is a lot trickier," says Jordan. "There is a lot of science in it."

He adds that Southwest is the first "primarily point-to-point" carrier moving to an O&D system.

The airline will test the technology's abilities on a number of days this fall, he says.

"We want to wait and watch, to make sure that the new system is managing the inventory buckets, and at the end of the day producing better results than the current system," he says.

"A lot of what it is doing is validating that the current system is pretty darn good," Jordan adds.

Still, executive expect the new technology to start paying dividends in the coming months.

"I expect a modest benefit in 2013 and the full benefit in 2014," says Jordan.