What is Yield Management

1
What is Yield Management?

• Experienced overbooking by an airline?
• American saved 1.4 billion from 1989 to 1992
  (50 more than its net profit)
• Management Science Technique to maximize revenue
  or profit
• Started at American in early 1970s.
• Decision Technologies Group
• Single most important technique since the
  airline deregulation CEO of American Airline

2
Components of Yield Management

• Overbooking
• Discount seat allocations
• Management of traffic through hub airports

3
Overbooking

• Passenger no-shows
• Direct loss of 50 million for typical majors
• Maximize passenger load factor by accepting
  reservations beyond seat capacity
• MR vs. MC of accepting reservations.
• Customer re-capture rate
• Customer satisfaction
• Linked with CRS (SABRE)
• Sophisticated mathematical algorithm

4
Discount Seat Allocation

• How many seats should be sold at reduced fare?
• Major concept is to extract consumer surplus
• Full fare vs. discount fare probabilities
• Sell-up probability.
• Remaining time till departure
• Highest-revenue seats are always available
• Stop selling discount seats when the MR of
  discount seat expected future revenue of
  full-fare
• Initiated by British Airways

5
Hub Traffic Management

• Which flight combinations should be available
  and at what price?
• Connecting passengers generate more revenues
• Round-trip passengers generate more revenues
• Seat allocation by fare must also be considered
• Extremely complex problem, as there are very
  large number of possible combinations!!!
• Virtual Nesting technique by American

6
Hub Traffic Management

• Groups seats of different flights with similar
  fares (buckets)
• Tickets sold only if all legs in the itinerary
  have available seats in the bucket of interest.
• The highest-fare combinations are always
  available until flight closed.
• Total of eight buckets are used by American
• Mixed-Integer and dynamic programming techniques

7
Performance Measures

• Method by American Define the range of Best
  and Worst revenue (revenue opportunity)
• Overbooking 90 of revenue opportunity.
• Seat allocation traffic management 50 of
  revenue opportunity

8
Future of Yield Management

• Understand customer behavior
• Customer choice model is particularly important.
• Airline choice, fare-class choice, sell-up
  choice, airport choice, re-capture rate, reaction
  of bumping.
• Combine current technique with customer behavior
  models to enhance revenues.

9
Discussion Questions

• What is the goal of yield management?
• As a passenger do you like yield management by
  airlines?
• What are the disadvantages of using yield
  management?
• What is the future direction of yield
  management? What additional factors should be
  considered?
• Can the concept of yield management be applied to
  Supply Chain Management?