Yield Management for Travel and Transportation

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Yield Managementfor Travel and Transportation

• Barry C. Smith
• Sabre
• May 1999

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The Role of Yield Management is to Help Match
Supply and Demand
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Airline Marketing Overview
Long- Term
Planning Scheduling
Strategic
Product Pricing
Yield Management
Short- Term
Sales and Distribution
Tactical
Customers
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Yield Management Goal Sell the Right Product to
the Right Customer at the Right Price
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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

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Airline Yield Management History
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Prior to De-regulation Airline Marketing was
Relatively Simple
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The Business Process Was ComplexBut Manual
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Price Competition Began in the Early 1970s
Charter carriers were formed that offered
fares significantly lower than scheduled carriers
Public charters offered quasi-scheduled service
AA developed part-charters
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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 regulationin 1980
• CAB was sunset 1/1/85
• Airlines stopped operating as public utilities
  and started to compete

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The Early-80s Brought Loses for Airlines

• Many new carriers
• 1978 36
• 1984 123
• Unchecked capacitygrowth in key markets
• Widespread discounting

0
200M
500M
800M
-200
1980
-400
1981
-600
-800
1982
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In 1986 Yield Management Became aStrategic Tool

• People Express (PE) started service in 1981,
  within5 years it became the 5th largest US
  airline
• Fastest growing company in US history
• Because of its significantcost advantage, PE
  couldoffer fares significantlylower than the US
  majors
• While the industry hadload factors in the mid
  50s,PE ran in the mid 70s
• The cost structure wasbased in part on
  PEsno-frills service offering

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AAs Pricing Strategy was made Practical byYield
Management

• AA realized that it produced empty seats at very
  low marginal costs
• In January 1985, AA launched a pricing
  campaigndirected at filling those empty seats
• Ultimate Super Saver
• Highly restricted
• Priced at or belowlow-cost carriers
• Full service
• PE load factors droppedimmediately from mid70s
  to mid 20s
• In September 1986, PEwas sold to CO

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Yield Management has been Applied to Many
Industries
Rail
Hotel
Cruise
Broadcast
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Yield Management Concepts
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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

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Yield Management Resource Allocation

• Stop selling low value products when Profit
  (low value) lt Profit (high value) P(Sell Out)

Sell to Low Value Customer
Low Value Profit
Sell out
High Value Profit
Hold for
Higher Value Customer
Unsold Product
0
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Most RM decisions are Variations of the Resource
Allocation Process

• Overbooking
• Discount allocation
• Network flow management
• Contract negotiation

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Most of the Effort in RM is Getting the Right
Data to the Resource Allocation Decision

• Pricing
• Data collection
• Forecasting
• Optimization
• Inventory Control

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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
  change100,000 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,sto
  chastic, network flow problem with
  over500,000,000 decision variables

Operate over 5,000 flights per day
Serve over 10,000 markets
Offer over 4,000,000 fares
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Revenue Management Impact on Airlines

• Increases revenues by3 6 with little impact
  on costs
• Operational issues with
• Airports
• Reservations agents
• Sales
• Revenue police
• Requires constant communications

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Yield Management Myths
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Revenue Management Myths

• Myth
• RM is price gouging

• Reality
• 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

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Revenue Management Myths

• Myth
• RM is price gouging
• RM leads to irrational pricing policies

• Reality
• 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

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Revenue Management Myths

• Myth
• RM is price gouging
• RM leads to irrational pricing policies
• RM will solve my profitability problems

• Reality
• 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

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Revenue Management Myths

• Myth
• RM is price gouging
• RM leads to irrational pricing policies
• RM will solve my profitability problems
• I need perfect data and forecasts to do RM

• Reality
• Data are never perfectly clean or complete
• Forecasts are never good enough
• Youre already making business decisions with
  flawed data you might as well make better
  decisions

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Revenue Management Myths

• Myth
• RM is price gouging
• 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

• Reality
• 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

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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