Capacity Management

Capacity Management is also known as Allocation or Allotment Management depending on which company you work for, but these terms are interchangeable.  In the service sector Capacity Management is key to managing supply and demand. 

As illustrated in the chart below Capacity is the supply.  Pricing manages demand.  And Revenue Management brings both of those together to optimize supply with demand for profit maximization.

This is how companies use pricing to maximize their capacity to obtain the best profitability.  However, as explained previously these service companies use Segment Pricing and Fenced Pricing to achieve even greater profitability as illustrated in the charts below.

In these charts we demonstrate a low market forecast and a strong market forecast.   

Low Market Forecast
Fare Class	Price	Forecast	Fare Allocation	Revenue
Y	$ 499	2	2	$ 998
B	$ 399	5	5	$ 1,995
S	$ 249	8	8	$ 1,992
M	$ 199	17	17	$ 3,383
R	$ 149	39	39	$ 5,811
Q	$ 129	47	47	$ 6,063
W	$ 119	53	53	$ 6,307
X	$ 99	104	29	$ 2,871
Seats	200	275	200	$ 29,420

In this example an airline with 200 seats allocates each seat to the highest fare class first and then goes down the level to the lowest fare class based on their forecast.  The forecast determines their booking priorities and how they allocate seats to each fare class.  In this example you will notice that the X class fare for $99 is only allocated 29 seats even though there is a demand for 104 seats.  And the airplane will fly with $29,420 of revenue onboard.

Now let’s look at the Strong Market forecast.

Strong Market Forecast
Fare Class	Price	Forecast	Fare Allocation	Revenue
Y	$‎ 499	10	10	$ 4,990
B	$‎ 399	14	14	$ 5,586
S	$‎ 249	23	23	$ 5,727
M	$‎ 199	59	59	$ 11,741
R	$‎ 149	69	69	$ 10,281
Q	$‎ 129	75	25	$ 3,225
W	$‎ 119	89	0	$ –
X	$‎ 99	113	0	$ –
Seats	200	275	200	$ 41,550

In this strong market you will notice the airline only allocates 25 seats to the Q fare class, and no seats to the W or X fare classes.  This flight is expected to fly with $41,550 of revenue.  Airlines put their fare allocations into their reservation systems based on the forecast for each flight.  And hotels do the same as discussed previously whether it is a Standard room or a Deluxe room or a Premium room.

The forecast determines the allocations.  People think that airlines or hotels are constantly changing their prices but in fact that is not true.  The prices do not change, it is the fare class allocations that are changing as bookings occur.  If a flight is not filling up as expected the airline will open more seats to lower class fares, or opposite if a flight is filling up quickly.  In a strong market the lower fare classes will be restricted and the airline will hold seats for higher fare classes passengers. 

Revenue Management involves Capacity Management and Forecasting.  In this article we gave examples of Capacity Management.  

The next article will discuss the forecasting process that companies use to determine their Capacity Management.