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Yield ManagementYield Managementfor Travel and Transportationfor Travel and Transportation
Barry C. SmithBarry C. Smith
SabreSabre
May 1999May 1999
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The Role of Yield Management is to Help Match Supply and Demand
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Planning & SchedulingPlanning & Scheduling
Product PricingProduct Pricing
Yield ManagementYield Management
Sales and DistributionSales and Distribution
Long-Long-TermTerm
Short-Short-TermTerm
StrategicStrategic
TacticalTactical
Airline Marketing Overview
CustomersCustomers
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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 Annual benefit of Yield Management to a major airlines is 3% – 6% of total to a major airlines is 3% – 6% of total revenuerevenue
American Airlines’ revenue benefits American Airlines’ revenue benefits from yield management exceed from yield management exceed $500,000,000 per year$500,000,000 per year
Applying this rate to the industry Applying this rate to the industry ($300 billion/year) yields potential ($300 billion/year) yields potential benefits of $15 billion per yearbenefits of $15 billion per year
The possibilities for even the most The possibilities for even the most sophisticated carriers go well sophisticated carriers go well beyond what is achieved todaybeyond what is achieved today
Airline Yield Management HistoryAirline 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 carriersCharter carrierswere formed thatwere formed that
offered faresoffered faressignificantly lowersignificantly lower
than scheduledthan scheduledcarrierscarriers
Public chartersPublic chartersofferedoffered
quasi-scheduledquasi-scheduledserviceservice
AA developedAA developedpart-charterspart-charters
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The 1978 Airline Deregulation Act
Deregulation mandatedDeregulation mandated End of route restrictions End of route restrictions
12/31/8112/31/81 End of rate regulation 1/1/83End of rate regulation 1/1/83
The CAB actually moved The CAB actually moved faster ending route regulation faster ending route regulation in 1979 and rate regulationin 1979 and rate regulationin 1980in 1980
CAB was sunset 1/1/85CAB was sunset 1/1/85 Airlines stopped operating as Airlines stopped operating as
public utilities and started to public utilities and started to competecompete
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The Early-80s Brought Loses for Airlines
Many new carriersMany new carriers 1978 – 361978 – 36 1984 – 1231984 – 123
Unchecked capacityUnchecked capacitygrowth in key marketsgrowth in key markets
Widespread discountingWidespread discounting
-$200-$200
00
-$400-$400
-$600-$600
-$800-$800
$200M$200M
$500M$500M
$800M$800M
19801980
19811981
19821982
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In 1986 Yield Management Became aStrategic Tool
People Express (PE) – started service in 1981, withinPeople Express (PE) – started service in 1981, within5 years it became the 5th largest US airline5 years it became the 5th largest US airline Fastest growing company in US historyFastest growing company in US history
Because of its significantBecause of its significantcost advantage, PE couldcost advantage, PE couldoffer fares significantlyoffer fares significantlylower than the US majors lower than the US majors While the industry hadWhile the industry had
load factors in the mid 50’s,load factors in the mid 50’s,PE ran in the mid 70’sPE ran in the mid 70’s
The cost structure wasThe cost structure wasbased in part on PE’sbased in part on PE’sno-frills service offeringno-frills service offering
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AA’s Pricing Strategy was made Practical byYield Management
AA realized that it produced empty seats at very low AA realized that it produced empty seats at very low marginal costsmarginal costs
In January 1985, AA launched a pricing campaignIn January 1985, AA launched a pricing campaigndirected at filling those empty seatsdirected at filling those empty seats Ultimate Super SaverUltimate Super Saver Highly restrictedHighly restricted Priced at or belowPriced at or below
low-cost carrierslow-cost carriers Full serviceFull service
PE load factors droppedPE load factors droppedimmediately from midimmediately from mid70’s to mid 20’s70’s to mid 20’s
In September 1986, PEIn September 1986, PEwas sold to COwas sold to CO
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Yield Management has been Applied to Many Industries
RailRail
HotelHotel
CruiseCruise
BroadcastBroadcast
Yield Management ConceptsYield Management Concepts
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Revenue Management Principles
Better to sell a product Better to sell a product cheaply than to have it cheaply than to have it perish at no valueperish at no value
Expand pricing structure Expand pricing structure to include peak and off-to include peak and off-peak ratespeak rates
Differentiate products to Differentiate products to avoid dilutionavoid dilution
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Yield Management Resource Allocation
Stop selling low value products whenStop selling low value products whenProfit (low value) < Profit (high value) * P(Sell Out)Profit (low value) < Profit (high value) * P(Sell Out)
Sell to Low Value CustomerSell to Low Value Customer
Hold forHold for
Higher Value Higher Value CustomerCustomer
Sell outSell outHigh Value ProfitHigh Value Profit
Unsold ProductUnsold Product
Low Value Profit Low Value Profit
$0$0
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Most RM decisions are Variations of the Resource Allocation Process
OverbookingOverbooking Discount allocationDiscount allocation Network flow Network flow
managementmanagement Contract Contract
negotiationnegotiation
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Most of the Effort in RM is Getting the Right Data to the Resource Allocation Decision
PricingPricing Data collectionData collection ForecastingForecasting OptimizationOptimization Inventory ControlInventory Control
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Major US domestic carriers:Major US domestic carriers:
Schedules change twice each weekSchedules change twice each week On a typical day, a major carrier will changeOn a typical day, a major carrier will change
100,000 fares100,000 fares Need to control the availability of every fare for flights Need to control the availability of every fare for flights
departing up to 1 year in advance in real-timedeparting up to 1 year in advance in real-time Yield management represents a multi-commodity,Yield management represents a multi-commodity,
stochastic, network flow problem with overstochastic, network flow problem with over500,000,000 decision variables500,000,000 decision variables
Operate overOperate over5,000 flights per day5,000 flights per day
Serve overServe over10,000 markets10,000 markets
Offer overOffer over4,000,000 fares4,000,000 fares
Technology has Evolved to Support Yield Management in Large and Dynamic Environments
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Revenue Management Impact on Airlines
Increases revenues byIncreases revenues by3% – 6% with little impact 3% – 6% with little impact on costson costs
Operational issues with:Operational issues with: AirportsAirports Reservations agentsReservations agents SalesSales
Revenue policeRevenue police Requires constant Requires constant
communicationscommunications
Yield Management MythsYield Management Myths
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Revenue Management Myths
Myth Myth RM is price gougingRM is price gouging
RealityReality RM typically does not set RM typically does not set
pricesprices Marketing should determine Marketing should determine
fair prices for peak and off-fair prices for peak and off-peak productspeak products
RM typically turns availability RM typically turns availability on and off for pre-determined on and off for pre-determined pricesprices
If cheap products are If cheap products are advertised, sufficient advertised, sufficient availability is necessary to availability is necessary to avoid “bait and switch” avoid “bait and switch” results results
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Revenue Management Myths
MythMyth RM is price gougingRM is price gouging RM leads to irrational pricing RM leads to irrational pricing
policiespolicies
RealityReality Irrational pricing is generally Irrational pricing is generally
caused by too much capacity caused by too much capacity in the marketplacein the marketplace
RM reduces the negative RM reduces the negative impact of irrational pricing impact of irrational pricing by limiting availability of low by limiting availability of low value products in high value products in high demand situationsdemand situations
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Revenue Management Myths
MythMyth RM is price gougingRM is price gouging RM leads to irrational pricing RM leads to irrational pricing
policiespolicies RM will solve my profitability RM will solve my profitability
problemsproblems
RealityReality RM can generate additional RM can generate additional
revenue and profitrevenue and profit RM requires senior RM requires senior
management commitment to management commitment to ensure cooperation between ensure cooperation between Marketing, Sales and Marketing, Sales and OperationsOperations
RM will not correct RM will not correct fundamental business fundamental business problemsproblems
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Revenue Management Myths
MythMyth RM is price gougingRM is price gouging RM leads to irrational pricing RM leads to irrational pricing
policiespolicies RM will solve my profitability RM will solve my profitability
problemsproblems I need perfect data and I need perfect data and
forecasts to do RMforecasts to do RM
RealityReality Data are never perfectly Data are never perfectly
clean or completeclean or complete Forecasts are never good Forecasts are never good
enoughenough You’re already making You’re already making
business decisions with business decisions with flawed data you might as flawed data you might as well make better decisionswell make better decisions
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Revenue Management Myths
MythMyth RM is price gougingRM is price gouging RM leads to irrational pricing RM leads to irrational pricing
policiespolicies RM will solve my profitability RM will solve my profitability
problemsproblems I need perfect data and I need perfect data and
forecasts to do RMforecasts to do RM RM is a zero sum game. My RM is a zero sum game. My
industry is better off if no industry is better off if no one introduces this one introduces this technologytechnology
RealityReality Given equivalent technology, Given equivalent technology,
all players in an industry are all players in an industry are more efficient and better offmore efficient and better off
The net ROI for the airline The net ROI for the airline industry is at least 10 to 1industry is at least 10 to 1
The danger is in being the The danger is in being the last to adopt the technologylast to adopt the technology
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Final Comments
SummarySummary Yield Management has evolved Yield Management has evolved
with the airline industrywith the airline industry Its role will change in the futureIts role will change in the future Yield Management applies to Yield Management applies to
many other industriesmany other industries These are powerful techniquesThese are powerful techniques
Concepts and benefits are Concepts and benefits are generalizablegeneralizable
So are issuesSo are issues Lessons LearnedLessons Learned
Understand the businessUnderstand the business Secure senior management Secure senior management
supportsupport Be carefulBe careful