Yield Management for Competitive Advantage in the Airline Industry Dr. V. Sridhar Information Management area Management Development Institute Gurgaon sridhar@mdi.ac.in August 14, 2010 Management Information Systems 1
What is Yield Management? Selling the right seats to the right customers at the right prices Control and management of reservation inventory in a way that increases / maximizes company profitability, given the flight schedules and fare structure The combination of flight schedules and fares defines products to be offered to the public yield management determines how much of each product to put on shelf August 14, 2010 Management Information Systems 2
Need for Yield Management price based competition, low-fare airlines, multiple markets, increasing customer demand How to survive in the market place plane seats are perishable inventory If the plane leaves the gate with empty seats, this inventory cannot be stored and is lost. If an airline can minimize the inventory spoilage, then it will operate much more efficiently. August 14, 2010 Management Information Systems 3
Airlines Storefront Offers schedules and fares Captures sales and cancellations transactions from Airlines reservation agents, travel agents, and now the Internet Yield Management should determine whether to accept new reservations or not August 14, 2010 Management Information Systems 4
Yield Management System Over Booking Yield Management System Traffic Management Discount Allocation August 14, 2010 Management Information Systems 5
Over Booking Intentionally selling more reservations for a flight than there are actual seats on the aircraft To offset the effect of passenger cancellations and no-shows By properly selling reservation levels higher than seating capacity, the airlines can compensate for passenger cancellations, resulting in greater utilization Poor overbooking can be costly If reservation levels are kept too low, then flights may depart with empty seats which could have been filled by turned-away demand» spoilage results in lost-opportunity cost to the Airlines August 14, 2010 Management Information Systems 6
Cost of Overbooking If passengers with reservations are turned away, the airline has to compensate for the inconvenience of passengers Choose the best overbooking level Balancing additional revenue that can be gained by selling a reservation against the cost of the additional overbooking risk August 14, 2010 Management Information Systems 7
Relationship Between Overbooking and Revenue Revenue and Costs Passenger Revenue Net revenue Capacity Oversale cost No. of seats to make available Net Revenue = Total Passenger Revenue Oversale Cost Optimal overbooking level occurs where the marginal revenue gained from allowing additional reservation equals the marginal cost of an additional oversale August 14, 2010 Management Information Systems 8
Discount Seat Allocation When all passengers are paying the same fare, overbooking provides the complete yield management solution If there are different fare types (Y, M, Q) Control availability by class code How many seats on each flight should be sold at reduced fares to produce a full aircraft? How can those reduced-fare seats be allocated so as to minimize lost opportunities to sell full-fare seats? Sell to Full Fare (p) Full Fare Reject Request Do Not Sell to Full Fare (1-p) 0 revenue Accept Request Discount Fare August 14, 2010 Management Information Systems 9
How to determine when to withhold? The probability of request receiving full fare for a seat after rejecting a discount p is determined by Future expected demand The accuracy of the demand forecast Sell-up (discount-fare passengers choose to pay full fare when told the discount fare is not available) probability August 14, 2010 Management Information Systems 10
Nesting of Fare Classes the marginal value of a request for a seat at a particular fare is balanced against the marginal net revenue from all other available fares. Full Fare has 100 seats available Moderate Discount has 60 seats available Deep Discount has 30 seats available August 14, 2010 Management Information Systems 11
Traffic Management Airlines develop huband-smoke system of scheduling flights Passengers go to hub airport to reach the destination Flights serve multiple markets Fares for a single class code may be substantially different depending on markets August 14, 2010 Management Information Systems 12
Customer Demand Forecasting passenger demand Factors affecting passenger demand include flight departure time connecting service time required for the complete trip, price, restrictions and cancellation penalties, and so on. August 14, 2010 Management Information Systems 13
Measuring Performance Revenue opportunity statistics to track yield management performance Estimate revenue with perfect discount controls (maximum revenue) Estimate revenue without discount controls (minimum revenue) Compare actual revenue withy maximum and minimum revenue max Actual Min August 14, 2010 Management Information Systems 14
ITC Infrastructure Keep track of transactions across different channels Prepare an integrated data warehouse Use Business Intelligence for Yield Management Communications Infrastructure to connect different channels August 14, 2010 Management Information Systems 15
Automated Passenger Reservation Systems Provides an interface between reservation agents/ Internet and the passengers Controls the availability of seat inventory Permits collection of data such as recapture of customers, customers first and second choices Key component of Yield Management system Developed as Semi-Automated Business Research Environment (SABRE) by American Airlines Decision Technologies Yield management saved American Airlines $1.4 billion over a three-year period in which its net profits were only $892 million. August 14, 2010 Management Information Systems 16