Yield Management for Travel and Transportation
The Role of Yield Management is to Help Match Supply and Demand
Airline Marketing Overview
Yield Management Goal: Sell the Right Product to the Right Customer at the Right Price
Yield Management is Essential to Airline Profitability
- Annual benefit of Yield Management to a major airlines is 3% – 6% of total revenue
- American Airlines’ revenue benefits from yield management exceed $500,000,000 per year
- Applying this rate to the industry ($300 billion/year) yields potential benefits of $15 billion per year
- The possibilities for even the most sophisticated carriers go well beyond what is achieved today
Airline Yield Management History
Prior to De-regulation Airline Marketing was Relatively Simple
The Business Process Was Complex But Manual
Price Competition Began in the Early 1970s
The 1978 Airline Deregulation Act
- Deregulation mandated
- End of route restrictions 12/31/81
- End of rate regulation 1/1/83
- The CAB actually moved faster ending route regulation in 1979 and rate regulation in 1980
- Airlines stopped operating as public utilities and started to compete
The Early-80s Brought Loses for Airlines
- Unchecked capacity growth in key markets
In 1986 Yield Management Became a Strategic Tool
- People Express (PE) – started service in 1981, within 5 years it became the 5th largest US airline
- Fastest growing company in US history
- Because of its significant cost advantage, PE could offer fares significantly lower than the US majors
- While the industry had load factors in the mid 50’s, PE ran in the mid 70’s
- The cost structure was based in part on PE’s no-frills service offering
AA’s Pricing Strategy was made Practical by Yield Management
- AA realized that it produced empty seats at very low marginal costs
- In January 1985, AA launched a pricing campaign directed at filling those empty seats
- Ultimate Super Saver
- Highly restricted
- Priced at or below low-cost carriers
- Full service
- PE load factors dropped immediately from mid 70’s to mid 20’s
- In September 1986, PE was sold to CO
Yield Management has been Applied to Many Industries
Yield Management Concepts
Revenue Management Principles
- Better to sell a product cheaply than to have it perish at no value
- Expand pricing structure to include peak and off-peak rates
- Differentiate products to avoid dilution
Yield Management Resource Allocation
Stop selling low value products when Profit (low value) < Profit (high value) * P(Sell Out)
Sell to Low Value Customer
Most RM decisions are Variations of the Resource Allocation Process
Most of the Effort in RM is Getting the Right Data to the Resource Allocation Decision
Technology has Evolved to Support Yield Management in Large and Dynamic Environments
- Major US domestic carriers:
- Schedules change twice each week
- On a typical day, a major carrier will change 100,000 fares
- Need to control the availability of every fare for flights departing up to 1 year in advance in real-time
- Yield management represents a multi-commodity, stochastic, network flow problem with over 500,000,000 decision variables
Revenue Management Impact on Airlines
- Increases revenues by 3% – 6% with little impact on costs
- Operational issues with:
- Airports
- Reservations agents
- Sales
- Requires constant communications
Yield Management Myths
Revenue Management Myths
- RM typically does not set prices
- Marketing should determine fair prices for peak and off-peak products
- RM typically turns availability on and off for pre-determined prices
- If cheap products are advertised, sufficient availability is necessary to avoid “bait and switch” results
Revenue Management Myths
- RM leads to irrational pricing policies
- Irrational pricing is generally caused by too much capacity in the marketplace
- RM reduces the negative impact of irrational pricing by limiting availability of low value products in high demand situations
Revenue Management Myths
- RM leads to irrational pricing policies
- RM will solve my profitability problems
- RM can generate additional revenue and profit
- RM requires senior management commitment to ensure cooperation between Marketing, Sales and Operations
- RM will not correct fundamental business problems
Revenue Management Myths
- RM leads to irrational pricing policies
- RM will solve my profitability problems
- I need perfect data and forecasts to do RM
- Data are never perfectly clean or complete
- Forecasts are never good enough
- You’re already making business decisions with flawed data you might as well make better decisions
Revenue Management Myths
- RM leads to irrational pricing policies
- RM will solve my profitability problems
- I need perfect data and forecasts to do RM
- RM is a zero sum game. My industry is better off if no one introduces this technology
- Given equivalent technology, all players in an industry are more efficient and better off
- The net ROI for the airline industry is at least 10 to 1
- The danger is in being the last to adopt the technology
Final Comments
- Summary
- Yield Management has evolved with the airline industry
- Its role will change in the future
- Yield Management applies to many other industries
- These are powerful techniques
- Concepts and benefits are generalizable
- So are issues
- Lessons Learned
- Understand the business
- Secure senior management support
- Be careful