Boston Consulting Group: The Great Reset for Revenue Management in Travel

The COVID-19 crisis quickly brought the travel and tourism industry to a virtual standstill, as steep drops in demand forced unprecedented capacity adjustments by airlines, cruise lines, hotels, railways, car rental companies, and tour operators. But when the inevitable recovery comes—perhaps in months, although it may take longer—this industry will confront a problem that few have ever faced: setting prices and generating revenue from scratch.

The crisis has rendered meaningless the typical reference points—including historical booking patterns and trends—that drive price optimization. This drastic change has essentially turned companies' revenue management (RM) systems into blank slates. In addition, markets will probably be fundamentally reshaped in the aftermath of the pandemic. For an extended period, travel demand will be lower than precrisis levels, and travel patterns are likely to be very different.

Companies that move the fastest and remain the most flexible in understanding and adapting to these new conditions have the potential to gain significant market share and secure their positions. Amidst the high levels of uncertainty and volatility, travel and tourism companies need to manage pricing and customer relationships in the short term, while retuning their RM systems to optimize revenues for the economic recovery.

MANAGING PRICING AND CUSTOMER RELATIONSHIPS IN THE SHORT TERM

Demand for travel and tourism has fallen precipitously, at first fueled by a reluctance to travel during coronavirus outbreaks and later reinforced by government-issued travel bans. Previous demand shocks—such as those caused by deep recessions—have usually triggered corporate demand to fall off sharply and quickly, while leisure demand declined more gradually. But the COVID-19 crisis has caused all forms of demand to plummet simultaneously. Massive capacity adjustments have quickly followed. Airlines and tour operators canceled about half-a-million flights from March through May, cruise lines moored numerous ships in harbors, and high-speed railways in Germany, Italy, Spain, and other European countries saw traffic decline drastically. Regardless of how acute this situation looks, no company can assume that price cuts will boost volume in the short term as they usually do under normal circumstances. Making any significant price moves now is dangerous, because a company's RM system could overreact. RM systems were never designed and calibrated to handle the extremes of the current circumstances.