Name.ppt © 1998 The SABRE Group 1 Yield Management for Travel and Transportation Barry C. Smith Sabre May 1999

Name.ppt © 1998 The SABRE Group1

Yield ManagementYield Managementfor Travel and Transportationfor Travel and Transportation

Barry C. SmithBarry C. Smith

SabreSabre

May 1999May 1999


The Role of Yield Management is to Help Match Supply and Demand


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


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 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


Prior to De-regulation Airline Marketing was Relatively Simple


The Business Process Was ComplexBut Manual


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


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


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


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


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


Yield Management has been Applied to Many Industries

RailRail

HotelHotel

CruiseCruise

BroadcastBroadcast

Yield Management ConceptsYield Management Concepts


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


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


Most RM decisions are Variations of the Resource Allocation Process

OverbookingOverbooking Discount allocationDiscount allocation Network flow Network flow

managementmanagement Contract Contract

negotiationnegotiation


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


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


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


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



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




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





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





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


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

Documents

Name.ppt © 1998 The SABRE Group 1 Yield Management for Travel and Transportation Barry C. Smith Sabre May 1999