The financial risk of airline revenue management

Every business faces risk. Without risks, no company would be able to achieve anything or make a profit. The question every business faces is how to balance risk and reward. To do this the corporate entity must understand its risk set, the sources of those risks and the costs associated with operating within the particular set of risks. Airlines are no exception. For nearly two decades airlines have been implementing revenue management systems to improve revenue results without considering the risks assumed or the consequences. The industry has now faced two major business cycles using revenue management and experienced revenue meltdown twice. This paper explores how airlines can understand the risk incurred in their revenue management policies. After examining the risk profile of a revenue management system, the paper looks at how risk management measurements and methods can be applied to the practice of airline revenue management practice.