Yield Management for Travel and Transportation

1. Yield Managementfor Travel and Transportation Barry C. Smith Sabre May 1999

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

3. Airline Marketing Overview Long- Term Planning & Scheduling Strategic Product Pricing Yield Management Short- Term Tactical Sales and Distribution Customers

4. Yield Management Goal: Sell the Right Product to the Right Customer at the Right Price

5. 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

6. Airline Yield Management History

7. Prior to De-regulation Airline Marketing was Relatively Simple

8. The Business Process Was ComplexBut Manual

9. 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

10. 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

11. 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

12. 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 50’s,PE ran in the mid 70’s • The cost structure wasbased in part on PE’sno-frills service offering

13. AA’s 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 mid70’s to mid 20’s • In September 1986, PEwas sold to CO

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

15. Yield Management Concepts

16. 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 Revenue Management Principles

17. Yield Management Resource Allocation Stop selling low value products when Profit (low value) < 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

18. Most RM decisions are Variations of the Resource Allocation Process • Overbooking • Discount allocation • Network flow management • Contract negotiation

19. Most of the Effort in RM is Getting the Right Data to the Resource Allocation Decision • Pricing • Data collection • Forecasting • Optimization • Inventory Control

20. 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,stochastic, 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

21. 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

22. Yield Management Myths

23. 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 Revenue Management Myths

24. 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 Revenue Management Myths

25. 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 Revenue Management Myths

26. 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 You’re already making business decisions with flawed data you might as well make better decisions Revenue Management Myths

27. 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 Revenue Management Myths

28. 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 Final Comments