Airline Yield Management

AIRLINE YIELD

MANAGEMENT May

2009 V K R B

Frau Prof. Schusteritsch

Julius Neubauer, 5BT Kärntner Tourismusschulen Warmbad Villach

Airline Yield Management 2009

Julius Neubauer 2

I. PREFACE

As the global financial crisis continues to expand, it becomes increasingly important for

companies of each economic sector to ensure and optimize its revenues. Airlines

already recognized this in the late 70s, when the airline deregulation act was signed

into law by the President of the United States of America. The purpose of this act was

to remove governmental control over fares, routes and the market entry of new

airlines. This led to an oversaturation of capacities in this market because within a few

years many new private airlines emerged. In this time they were constantly keen on

improving their cost structures to remain competitive. This was yield management’s

hour of birth.

Yield Management enabled airlines to dynamically adjust fares according to demand

and to appeal to different target groups by offering customized rates. The basic

consideration of Yield Management is to sell goods or services for the highest price a

customer is willing to pay. To achieve this it utilizes several techniques, all explained in

detail in the course of this skilled work.

I decided to choose Yield Management because I think it’s one of the most important

processes for airlines. Being in proper use, it enables companies to stimulate demand,

adjust fares and make crucial decisions on seat allocation. During my research I read

several books and dissertations which gave me a many-sided insight on this matter. It

was very interesting to compare the different points of view of each author and hence

draw my own conclusions.

But I also encountered a few problems. In search of information for a case study on

how airlines actually imply yield management, I figured out that this information is

considered confidential. So, all airlines that I was in correspondence with rejected my

requests. To prove this, I decided to attach two emails in the appendix.

II. DECLARATION OF INDEPENDENCE

With these words I am declaring that I have written this skilled work on my own, that I

have just used the stated records and that I have submitted this skilled work nowhere

else for examination purposes.

Villach, May 2009

Julius Neubauer


Julius Neubauer 3

III. TABLE OF CONTENTS

I. PREFACE ....................................................................................................................................... 2

II. DECLARATION OF INDEPENDENCE ................................................................................................ 2

III. TABLE OF CONTENTS .................................................................................................................... 3

IV. TABLE OF FIGURES ........................................................................................................................ 4

V. PASSENGER AVIATION IN GENERAL .............................................................................................. 5

1. EUROPEAN BEGINNINGS ....................................................................................................................... 5

2. AMERICAN BEGINNINGS ....................................................................................................................... 5

3. AIRLINES TODAY ................................................................................................................................. 6

4. STRATEGIC ALLIANCES .......................................................................................................................... 8

A. Development ............................................................................................................................. 8

B. Alliances today .......................................................................................................................... 8 I. Star Alliance ......................................................................................................................................... 8 II. oneworld ............................................................................................................................................. 9 III. SkyTeam .............................................................................................................................................. 9

C. Aims and benefits of strategic alliances ................................................................................. 10

5. CODE SHARING ................................................................................................................................. 10

A. Advantages ............................................................................................................................. 10

B. Disadvantages ........................................................................................................................ 11

VI. YIELD MANAGEMENT 101 .......................................................................................................... 11

1. DEFINITION ..................................................................................................................................... 11

2. DEVELOPMENT ................................................................................................................................. 12

3. REQUIREMENTS FOR THE IMPLEMENTATION OF YM................................................................................. 13

VII. INSTRUMENTS USED BY YIELD MANAGEMENT ...................................................................... 14

1. MARKET SEGMENTATION ................................................................................................................... 14

2. PRICE DIFFERENTIATION ..................................................................................................................... 16

3. CAPACITY MANAGEMENT ................................................................................................................... 19

A. Price/Quantity Management .................................................................................................. 20 I. Demand Management ....................................................................................................................... 20 II. Data Acquisition and Forecasting ...................................................................................................... 21 III. Allocation ........................................................................................................................................... 22

1. Limiting curves ............................................................................................................................. 23 2. Constant allocation ...................................................................................................................... 24 3. Nesting ......................................................................................................................................... 25 4. Network Yield Management ........................................................................................................ 26

B. Overbooking Control ............................................................................................................... 28

VIII. SOFTWARE - NAVITAIRE “SKY PRICE” ..................................................................................... 31

1. COMPANY OVERVIEW ....................................................................................................................... 31

2. “SKYPRICE” ..................................................................................................................................... 32

IX. CONCLUSION .............................................................................................................................. 33

X. APPENDIX ................................................................................................................................... 34

XI. BIBLIOGRAPHY ........................................................................................................................... 39


Julius Neubauer 4

IV. TABLE OF FIGURES

Figure 1: US Airline route structure before the Second World War. ........................................... 5

Figure 2: US-Airline development from 1914 to 1928 ................................................................. 5

Figure 3: Development of airlines compared to strategic alliances.............................................. 8

Figure 4: Member airlines ranked by passenger numbers ........................................................... 9

Figure 5: Aims and benefits of strategic alliances ....................................................................... 10

Figure 6:Boarding Pass of a code shared flight: .......................................................................... 11

Figure 7: Basic idea of yield management .................................................................................. 11

Figure 8: Correlation between marketing and YM ..................................................................... 12

Figure 9:US-Airline route structure after deregulation in 1978 .................................................. 13

Figure 10: Typical timeline of reservations of private and business travelers ........................... 16

Figure 11: Developement of passenger volume in Germany, sorted by occasion ..................... 16

Figure 12: Impact of price ranges on the contribution margin ................................................... 17

Figure 13: From price differentiation to YM ............................................................................... 18

Figure 14: Course of booking without demand management .................................................... 20

Figure 15: Impact of DM on the revenue .................................................................................... 21

Figure 16: Splitting of physical- into virtual compartments ....................................................... 22

Figure 17: Predicted course of booking calculated by a forecast model .................................... 23

Figure 18: Calculated puffer zones ............................................................................................. 23

Figure 19: Fully implemented limiting curve .............................................................................. 23

Figure 20: Static allocation of virtual compartments (VC) .......................................................... 24

Figure 21: Basics of nesting ......................................................................................................... 25

Figure 22: Hub and spoke system ............................................................................................... 26

Figure 23: Value of different legs and itineraries........................................................................ 27

Figure 24: Virtual Nesting for MUC – DUB (via STN) .................................................................. 27

Figure 25: Load factor on a non-overbooked flight .................................................................... 28

Figure 26: Load factor on a overbooked flight without restrictions ........................................... 28

Figure 27: Load factor on a flight with optimized overbooking rate. ......................................... 29

Figure 28: Calculation of optimal overbooking rate .................................................................. 29

Figure 29: Graduated overbooking rate ..................................................................................... 30


Julius Neubauer 5

0

10

20

30

1914 1918 1922 1926 1928

Number of US-Airlines

FIGURE 1: US AIRLINE ROUTE STRUCTURE BEFORE

THE SECOND WORLD WAR.

V. PASSENGER AVIATION IN GENERAL

1. EUROPEAN BEGINNINGS

On November 20th, 1909, Ferdinand Graf von Zeppelin founded the world’s first airline,

based in Frankfurt am Main. The “DELAG” (German Airship Corporation) carried more

than 34.000 passengers between 1910 and 1913.

The “DELAG“ was followed by further companies. In 1913 a large-area transportation

network existed between Düsseldorf, Baden-Oos, Berlin-Johannistal, Gotha, Frankfurt

am Main, Hamburg, Dresden and Leipzig.

The foundation of the “Deutsche Luft Hansa AG” in January 1926 is considered a big

step forwards in the European passenger aviation. It resulted from the merge of the

two leading German airlines: “Deutscher Aero Lloyd AG” and “Junkers-Luftverkehrs

AG”.

This emerging state-run airline was very fast-paced. So the “Luft Hansa” was able to

take up business to Far-East and South American destinations already one year after its

foundation. 1

Further important airlines at this time:

2. AMERICAN BEGINNINGS

The American civilian route structure was

developed merely sporadic in the nineteen-

twenties (see fig. 2). It was rather designed for

the transportation of airmail. This changed as

soon as the “Ford Trimotor” (A propeller-driven

aircraft with capacity for twelve passengers)

was introduced in 1925. This is considered the

starting shot for the boom of passenger aviation

in America.

An even more exhilarant event was the first solo-

transatlantic flight by Charles Lindbergh on

May 19th, 1927. Since then the number of US-

airlines has nearly doubled (see fig. 1). 2

1 cf. Fluggesellschaft, http://de.wikipedia.org/wiki/Fluggesellschaft, As at 27.1.2009 2 cf. Airline, http://en.wikipedia.org/wiki/Scheduled_air_transport, As at 26.1.2009

founded in

KLM 1919

Air France 1933

Aero O/Y (nowadays Finnair) 1924

Aircraft Transport and Travel 1919

Imperial Airways 1923

FIGURE 2: US-AIRLINE DEVELOPMENT FROM

1914 TO 1928

http://de.wikipedia.org/wiki/Gotha

http://de.wikipedia.org/wiki/Frankfurt_am_Main



http://de.wikipedia.org/wiki/Hamburg

http://de.wikipedia.org/wiki/Dresden

http://de.wikipedia.org/wiki/Leipzig


Julius Neubauer 6

The most important airlines at this time were:

3. AIRLINES TODAY

An airline generally provides air transporation services for passengers or freight,

generally with a recognized operating certificate or license.

Nowadays, airlines can be divided into network-, charter- and low-cost carriers:

Network Carriers:

A network carrier is a carrier that provides scheduled flight services within a hub &

spoke (see figure 22) system.3 They are often state-run (Flag carriers) but most

commonly in private ownership, or with a governmental share.

State-run airlines: (Flag carriers)

This means state-run and financed airlines. They are also called flag

carriers because they are considered to be an object of prestige,

carrying the ensign on each aircraft.

The term “Flag carrier” is a legacy from the time when countries

founded state-run airlines. Aviation rights were often negotiated

between governments, denying private airlines an open market. So,

many nations were forced to launch airlines to remain competitive.

Some countries also launched them for nationalist reasons and to

stimulate its economy.4

But a flag carrier does not have to be state-run, as long as it is

designated by a country’s government.

Due to the availability of public funds, flag carriers aren’t so much

exposed to market fluctuation as a private carrier would be.

Examples are: EgyptAir, Emirates Airlines (fully state-owned)

Air France, Alitalia (partial governmentally share)

Lufthansa, Quantas (private ownership)

Charter airlines:

This means airlines, that normally do not offer own flights, but flight services to

individuals, tour operators and other tourism businesses.

It differs itself from network carriers as it does not sell tickets directly to the customer.

In most cases a charter company sells certain contingents to travel agencies,

companies or even sports teams.

3 cf. Airline, http://en.wikipedia.org/wiki/Scheduled_air_transport, As at 14.3.2009 4 cf. Flag carrier, http://en.wikipedia.org/wiki/Flag_carrier, As at 15.3.2009

founded in

Delta Air Lines 1924

United Air Lines 1926

Eastern Air Lines 1926

Northwestern Air Lines 1926

American Airlines 1930


Julius Neubauer 7

They also distinguish themselves from “regular” airlines through the airports they

serve. Whilst large network carriers use established hub & spoke networks, charter

airlines offer only point-to-point flights, serving smaller, remote airports in order to

minimize costs and offer faster connections.5

Furthermore, charter airlines are expected to offer lower fares than network carriers.

To reach this, intergovernmental, conditional agreements were made to relieve them

of taxes and dues.

Two of these conditions were:

A charter flight may only be offered in conjunction with a touristic service

Tourists arriving by charter may only depart by a charter flight.

Hence, the lower fares result from:

very high load factors (90% and above)

guaranteed sale of the total or partial capacities through travel agencies or

others

lower landing fees at remote airport

ticketing and administration savings (ticketing is usually done by travel

agencies)

The most established charter airline is the German Condor Airline. It is a subsidiary

company of Lufthansa.

Low-cost carriers:

A low cost carrier is an airline that offers very low fares by focusing on the core service

of a flight, the transportation without any frills. The low fares are achieved by

restrictions on flexibility, service and in-flight-comfort. Free rebooking to other flights

is either impossible or connected with extensive costs for the customer, on-board

meals are available, but pricy and departure- and arrival airports are often away from

international airports. They mostly offer short- and medium-haul-flights at notably

lower fares. Their profit results particularly from a higher load factor.

But these are only the measures that can be noticed by the customer. However there

are several measures set in the background:

uniform fleet (lower maintenance costs)

short turnaround times

single-class cabin

minimum crew (as permitted by law)

Established European low-cost carriers are: Ryanair, Easyjet, SkyEurope and Air Berlin.6

5 cf. Air charter, http://en.wikipedia.org/wiki/Air_charter, As at 15.3.2009 6 cf. Fluggesellschaft, http://de.wikipedia.org/wiki/Fluggesellschaft, As at 24.1.2009


Julius Neubauer 8

Attached in the appendix you can find up-to-date statistic and transportation numbers.

4. STRATEGIC ALLIANCES

A strategic alliance is seen to be a cooperation amongst aviation companies.

At the same time each single company remains legally independent, but coordinates

certain elements like booking systems, frequent flyer programs, interconnecting flights

and “lease” contingents of seats among themselves (code sharing).7

A. DEVELOPMENT

The first international strategic alliance was founded in 1986, as Air Florida and British

Airways agreed to operate the route London – Amsterdam code shared. By the end of

the nineties the formation of alliances was favored by the economic crisis in south- and

East Asian tiger states and constantly increasing kerosene prices.

Figure 3 illustrates the historic development of airlines versus strategic alliances:8

Year 1994 1995 1996 1997 1998 1999 2000 2001

Airlines 136 153 159 177 196 204 220 200

Alliances 280 324 389 363 502 513 579 501

B. ALLIANCES TODAY

At present three global alliances exist:

Star Alliance

OneWorld

SkyTeam

I. STAR ALLIANCE

Star Alliance was founded in 1997 as the worldwide first strategic merge of Air Canada,

Lufthansa, SAS, Thai Airways International and United Airlines. The code shared (see

page 10) operation of several routes began in the very same year.

Today it counts more than twenty members and carries nearly 500 million passengers

per year. Its fleet counts 3325 aircrafts, which serve 912 airports in 159 countries.9

7 cf. Allianz (Luftfahrt), de.wikipedia.org/wiki/Allianz_(Luftfahrt), As at 20.1.2009 8 cf. Sterzenbach, Conrady, Luftverkehr, Betriebswirtschaftliches Lehr- und Handbuch. München/Wien: Oldenburg Verlag 2003, Page 205 9 cf. Facts&Figures, http://www.staralliance.com/de/press/facts_figures/index.html, As at 16.1.2009

FIGURE 3: DEVELOPMENT OF AIRLINES COMPARED TO STRATEGIC ALLIANCES


Julius Neubauer 9

II. ONEWORLD

In September 1998 American Airlines, British Airways, Canadian Airlines, Cathay Pacific

and Quantas formed oneworld with the intention of generating more value for

customers, shareholders and employees than any airline can achieve by itself.

In 2008 oneworld has carried 320 million passengers using 2200 aircrafts, operated 3,5

million flights around the globe and generated a revenue of 100 billion US$.10

III. SKYTEAM

Delta Air Lines and Air France agreed to a partnership in 1999. Subsequent to the

joining of Aeromexican and Korean Air, the SkyTeam was formed.

The Alliance serves 905 destinations in 169 countries. Furthermore it has 2500 aircrafts

at its disposal, annually carrying 462 million passengers. A remarkable fact is that one

third of them are members in frequent flyer programs. 11

Figure 4 illustrates the main member airlines ranked by passengers transported each

year:

10 cf. Introduction to oneworld, www.oneworld.com/factsheet/W1_2009-01-08 introduction to oneworld.pdf, As at 27.1.2009 11 cf. skyteamFactSheet, www.skyteam.com/downloads/news/facts/skyteamFactSheet.pdf, As at 27.1.2009

Star

Alli

ance

•United Airlines

•US Airways

•Lufthansa

•All Nippon Airways

•Air China

•Air Canada

•SAS

•Singapore Airlines

•Turkish Airlines

On

eWo

rld

•American Airlines

•British Airways

•Iberia

•Quantas

•Cathay Pacific

•Aer Lingus

•Finnair

•Lan Chile

•Royal Jordanian

SkyT

eam

•Delta Air Lines

•KLM

•Air France

•Continental Airlines

•China Southern Air

•Korean Air

•Alitalia

•Aeromexico

•Czech Airlines

FIGURE 4: MEMBER AIRLINES RANKED BY PASSENGER NUMBERS


Julius Neubauer 10

C. AIMS AND BENEFITS OF STRATEGIC ALLIANCES12

FIGURE 5: AIMS AND BENEFITS OF STRATEGIC ALLIANCES

5. CODE SHARING

Code sharing is an often used means for load factor increase and the “expansion” of

route structures in strategic alliances

The term „code sharing“ is used if two or more airlines share capacities on a scheduled

flight. Each airline involved lists this flight on their own flight schedule with their own

flight number but it is conducted by only one of the partners, the so-called operating

carrier.

This allows airlines to offer flights that aren’t even conducted by themselves but by

alliance members (expansion of route structures). 13

A. ADVANTAGES

Linkage of route structures: Joint marketing of certain routes only makes them

profitable.

Decrease of competition between code sharing-partners.

Small airlines take advantage of bigger carrier reputations and big airlines vice

versa benefit from favorable cost structures.

12 cf. Sterzenbach, Conrady, 2003, Page 207 13cf. Codesharing, http://de.wikipedia.org/wiki/Codesharing, As at 2.2.2009

Market-directedaims

Market development

(through codesharing)

Increase of notoriety and image

Business-directed aims

Coordinated supply (planes, fuel)

Technical cooperation

(DP, Maintainance)

Joint marketing

Customerbenefits

Flight-plan enhancement

(more destinations, better coordinated)

Frequent flyer programs

valid intraalliancial

Lower fares

(according to studies, fares of alliance members

are about 29% lower)


Julius Neubauer 11

B. DISADVANTAGES

Massively increased coordination effort: Changes on the flight plan of

competitors can affect the load factor of own flights.

Quality standards of operating carriers don’t always match those of code

sharing partners. This can cause a negative overall impression for the

passenger.14

VI. YIELD MANAGEMENT 101

1. DEFINITION

Yield Management is the process of integrated price-

and capacity management with the objective of

splitting a total capacity given into partial capacities

and to assign them to different price ranges in order

to achieve a revenue optimization and profit maximization within the entire route

structure of an airline. 15 Airlines can usually achieve a 3-5% growth in revenues.

Lufthansa estimates its additional revenues caused by the implementation of Yield

Management System at 0,9 billion $ in 1997.16

The basic consideration is demonstrated by the following example:

An airline offers a flight from destination A to destination B. On this route two fares

are available: The full fare rate for 125€ or the discount fare for 75€, which has to be

booked early in advance:

14 cf. Sterzenbach, Conrady, 2003, Page 202 15 cf. Weiß Matthias,Häußler Steffen: Yield Management – Konzepte und Techniken. Studienarbeit, University of Hohenheim, 2005, Page 1 16 cf. Christoph Weber: Revenue Management am Beispiel von Airline Revenue Management, Hauptseminararbeit, University of Köln, 2007,

FIGURE 6:BOARDING PASS OF A CODE SHARED FLIGHT:

OPERATING CARRIER: HLX

CODESHARING-PARTNER: DLH

Flight from

A to B

Sell at Discount

Discount Fare:

75€

Do not sell at Discount

Sell at "Full-Fare"Full-Fare:

125€

Do not sell 0€

FIGURE 7: BASIC IDEA OF YIELD MANAGEMENT


Julius Neubauer 12

Now the question poses itself, whether the airline should accept the booking request

for one discount-fare ticket at an early point, or if it should wait until a full fare-request

emerges. But the second option involves the risk of not selling the seat at all.

Yield Management contains several instruments and techniques. It assumes that a

service is sold to different customers at different times at different prices. 17

Furthermore a powerful IT infrastructure has to be given to analyze historic data from

databases and calculate forecast models out of them.

Often also the term revenue- or profit management is used. This derives from the fact,

that “yield” (in airline business) defines the revenue per passenger kilometer.

Through its integrated pricing component it is linked closely to marketing.

The figure below illustrates this correlation:

FIGURE 8: CORRELATION BETWEEN MARKETING AND YM

2. DEVELOPMENT

The very beginnings of Yield Management can be found in the early sixties. At that

time the first controlled overbookings were allowed. This means that more seats were

sold than actually available. 18

As the American air transportation industry was deregulated in 1978, and airlines were

abruptly allowed to coordinate their destinations and fares themselves, a rapid

development of Yield Management succeeded due to fast emerging business

competition.

17 cf. Fricke Marco: Yield Management am Beispiel einer Fluglinie. Studienarbeit, University of Hamburg, 2005, Page 2 18 cf. Sterzenbach, Conrady, 2003, Page 335

Marketing

Product

Communication

Distribution

Yield Management

Capacity Management

Price/Quantity-Management

Overbookings

Price


Julius Neubauer 13

After the Airline Deregulation Act was signed into law by Jimmy Carter, 128 new

airlines appeared. This led to extensive overcapacities on the major routes and hence

to serious decline in prices (The flight price index dropped from $100 in 1977 to $87 in

198619). Through the favorable cost structures of smaller low cost carriers, the big

major airlines got into pressure to act because the market share of private carriers

rose and they could not keep up with the aggressive price-dumping. 20

So, the major airlines were forced to diverge from their present rate models and use

more flexible sales strategies. Therefore, Yield Management Systems were invented

and implemented to protect the high-yield segment and at the same time compete

against the low-yield segments of low cost carriers. 21

First to mention in this case is American Airlines. American Airlines already introduced

a capacity-controlled discount fare in 1975, called “Super-Saver”.

At this special fare, a specific contingent of seats is reserved for later booking business

travelers, but at higher rates. 22

The success of this uprising concept was remarkable. The increase in sales of American

Airlines was numbered at 221% from 1978 to 1988 and new competitors were

squeezed out of market within one year.

3. REQUIREMENTS FOR THE IMPLEMENTATION OF YM

For the successful implementation of Yield Management Systems, certain

requirements should be fulfilled: 23

Perishability of services:

A service expires if it isn’t used and can consequently not be sold any further

(ie: seats on a flight, hotel rooms). The service “perishes”.

Possibility of market segmentation:

In travel- and in touristic businesses as well as in airlines the target markets can

be well segmented into 2 main segments: business and private. Through

different rates, the willingness to pay of each individual segment can be well

exploited.

19 cf. Axt Martin: Yield Management bei Fluggesellschaften. Hausarbeit, University of Eichstätt-Ingolstadt, 2004, Page 2 20 cf. Weiß, Häußler, 2005, Page 1 21 cf. Sterzenbach, Conrady, 2003, Page 336 22 cf. Weiß, Häußler, 2005, Page 1 23 cf. Axt, 2004, Page 3

FIGURE 9:US-AIRLINE ROUTE STRUCTURE

AFTER DEREGULATION IN 1978


Julius Neubauer 14

Sale of a product prior to its use:

This is essential for the application of Yield Management Systems, because

otherwise Price/Quantity Management would be impossible.

Fluctuating demand:

The demand fluctuates in course of time. Without this factor, Yield

Management Systems would be unnecessary, because at a static demand, cost

structures and available capacities could be adjusted.

Strictly limited possibilities of capacity adjustment:

Available capacities cannot be increased or reduced without major

difficulties.24

Considering these requirements, it’s obvious that passenger aviation is almost

predestined for the implementation of Yield Management Systems. In the meantime

Yield Management is already being successfully implemented by car rentals, in the

hotel industry and at big events (i.e. concerts).

VII. INSTRUMENTS USED BY YIELD MANAGEMENT

The form of Yield Management that Airlines use is an extremely complex one. It utilizes

several instruments and techniques, which I would like to explain on the following

pages:

1. MARKET SEGMENTATION

To split a market up into single segments, you first have to determine its complete

potential. This means the- under certain conditions- achievable- total revenue on this

market. Related to airlines this means to determine the total demand of transportation

within the entire route structure. Subsequent, the total demand can be assigned to the

individual segments.

24 cf. Sterzenbach, Conrady, 2003, Page 338

Market segmentation

Price differentiation

Capacity Management


Julius Neubauer 15

The segmentation of a total market often becomes necessary because it consists of

demanders that differentiate themselves by the experienced benefit of a service and

their price elasticity. The carrier can leverage these differences by offering different

rate models that are individually shaped to each market segment’s requirements.

The objective of market segmentation is to split the collectivity of demanders into

individual segments on the basis of different criteria. These segments should in

themselves be as homogeneous (having the same claims) as possible but to one

another as heterogeneous (different) as possible. The results of this procedure then

provide a basis for price differentiation. 25

In passenger aviation two major segments can be can be clearly distinguished from

each other: Private and business travelers. These two major segments show several

varieties regarding their behaviors and claims.26

Private travelers:

Private travelers basically differ from business travelers in their behavior of

booking. They generally book their tickets far in advance and have high price

sensitivity. Private travelers mostly choose the lower-priced fare, which is often

linked to unfavorable restrictions as for example no free of charge rebooking

and cancellations. But these restrictions are not relevant for private travelers

because they assume that they will definitely be able to catch the booked

flight.

Business travelers:

Business travelers on the other hand book their tickets on short notice.

Therefore their price sensitivity is considerably lower than that of private

travelers. They appreciate the superior flexibility and comfort that higher

priced tickets offer. Thus most business-fares include amenities such as free of

charge rebooking and cancellations until take-off. These amenities are essential

for the business traveler because day-to-day business involves rescheduling

appointments and cancellations which often preclude from showing up in the

end. Another reason why people book business fares is that thereby the access

to airport lounges is granted. In these areas that are marked out from regular

waiting halls, all facilities necessary to proceed regular work during the waiting

period are given. These lounges nearly always dispose of wireless internet

access, laptop power supplies and sometimes restaurants, bars, shower rooms

and sleeping accommodations.

25 cf. Fricke, 2005, Page 14 26 cf. Sterzenbach, Conrady, 2003, Page 345


Julius Neubauer 16

FIGURE 10: TYPICAL TIMELINE OF RESERVATIONS OF PRIVATE AND BUSINESS TRAVELERS

FIGURE 11: DEVELOPEMENT OF PASSENGER VOLUME IN GERMANY, SORTED BY OCCASION

2. PRICE DIFFERENTIATION

Price differentiation is on hand if a provider offers identical or marginal different

services to different segments of a market at different prices. 27

Related to an airline, this definition can be explained as follows:

The market segmentation has shown that different customers are up to pay different

prices for nearly equal services (A flight from A to B, in this case). As already

mentioned there are two major segments on the aviation market: the very price

sensitive private travelers, who book their tickets far in advance and the business

traveler, who books on short notice and is not as price sensitive. Based on these

findings new rate models can be established that satisfy the claims of each segment

and benefit the contribution margin and load factor of all capacities available:

27 cf. Weiß, Häußler, 2005, Page 4

0

50

100

150

200

250

1976 1983 1990 1997 2004 2011 2018

Private

Business

0 364 Days before departure

Private traveler

Business traveler

Number of reservations


Julius Neubauer 17

A low-priced rate that is though endued with serious restrictions (called

fences). Classic fences of economy-fares are for example lower baggage limit,

limited service on board, the “Saturday night rule” and rebooking at extra

charge.

And a higher priced one with amenities like free rebooking and cancellations

and free access to airport lounges.

The thereby offered services can differ in space and on board service offered, but the

essential benefit (the flight A – B) remains the same for all passengers. 28

This figure shows that the introduction of additional booking classes can lead to an

increased possible contribution margin and with it a higher profit. But on the other

hand also the complexity of a Yield Management System rises with each additional

booking class introduced. This involves higher costs for customer information,

marketing and administration.

The objective of price differentiation is to fully exploit the willingness to pay of each

single customer by offering different booking classes. The correct economical term for

this procedure is skimming of customer surplus. This means the difference between

the price charged and the maximum price that the customer would be willing to pay

for a certain good or service.29

28 cf. Fricke, 2005, Page 18 29 cf. Weiß, Häußler, 2005, Page 4

50

6775

80 83,3

0

10

20

30

40

50

60

70

80

90

1 2 3 4 5

% o

f p

oss

ible

co

ntr

ibu

tio

n m

argi

n

P r i c e R a n g e s

FIGURE 12: IMPACT OF PRICE RANGES ON THE CONTRIBUTION MARGIN


Julius Neubauer 18

Yield Management differentiates prices as follows: 30

By compartment: First/Business/Economy

By time of booking: Early bird discount, last minute offers

By season: Strong or poor demand

By region: by airports of departure/arrival (special airport

surcharges) (also called Origin and Destination, O&D)

By destination: National/Continental/Intercontinental

By quantity: by amount of participating persons (volume discount)

By sales channel: online-only fares, direct booking cheaper than booking

via agency

In airline business, price differentiation is always linked to a quantity component.

As apparent from figure 13, a seasonal price differentiation charges different prices

at different times (higher prices on strong demand and lower prices on poor demand).

Now one might expect that only low fares are offered on poor demand and vice

versa. But this shapes up as wrong, because merely the size of contingents

(the amount of seats available) is adjusted (according to demand). This means:

The majority of seats is sold at low prices on poor demand but a small contingent

is reserved to customers willing to pay a higher price. This gets done to still be

able to satisfy the higher-value demand of business travelers (see figure 14 on

page 20).


FIGURE 13: FROM PRICE DIFFERENTIATION TO YM

Price

P1 P2 P3

Contingent P3

Contingent P2

Contingent P1

Price

Time

Mo Di Mi Do Fr Sa So

Price

Time

Seasonal price fluctuation

Weekly price fluctuation

Daily price fluctuation

Price

Time

02:00 – 19:00 19:00-02:00


Julius Neubauer 19

3. CAPACITY MANAGEMENT

At a constant rate of demand it would be sufficient to apply a differentiated pricing

system to assure an optimal revenue and profit. Unfortunately, customers demand

underlies permanent fluctuation. This can be caused by seasonal courses, sport events,

conventions, political and economical occasions.

Based on the assumption that customers with a lower willingness to pay book their

flights earlier than such with a higher one, it’s the objective of capacity management

to reserve enough capacities for late booking (and less price sensitive) segments of a

market.

The calculation of the optimal contingent size thus involves trading off the risk

of unassigned higher-priced seats against the “safe” revenue on low-priced seats that

are booked early in advance. 31

A further problem is that possible cancellations and rebooking just before take-off can

cause unused capacities. These are often enlarged through so called „no-shows“ (this

means passengers that have already booked a flight, but fail to show up in the end)

even more. A behavior like this can be observed in day-to-day business because it

sometimes doesn’t allow a passenger to show up in the end. Especially noteworthy is

that no-shows remain without any financial consequences, if the customer has booked

a full-fare-ticket. Otherwise the customer often has no claims of restitution and the

ticket simply expires.

Due to all above mentioned risk factors, airlines generally accept more bookings than

capacity allows. One talks about overbooking. But such an approach can lead to

passengers being refused boarding on the day of departure (generating additional

costs) because the cancellations and no-shows hoped for, did not occur and hence did

not compensate for the overbooked capacities. In addition to regular passengers, so

called „go-shows“ (unscheduled passengers that have bought their tickets either last

minute or on the day of departure) may emerge and further complicate this process. 32

Capacity Management mainly utilizes 2 elements:

Overbooking Control:

to calculate the optimal number of bookings to be accepted;

Price/Quantity Management:

to assign accepted bookings to available capacities and the right booking

classes;

On the following pages I would like to enlarge on these two main elements.

31 cf. Fricke, 2005, Page 18 32 cf. Weiß, Häußler, 2005, Page 7


Julius Neubauer 20

A. PRICE/QUANTITY MANAGEMENT

The main objective of Price/Quantity Management (as already mentioned) is to assign

accepted bookings to unallocated capacities and at the same time to the right

bookings classes. Along these lines it deals with the creation of contingents to be able

to distinguish the lower-value demand of tourists and private travelers from higher-

value demand of business travelers.

In order to subsequently deal with these subjects, the basics of demand management

and data acquisition and forecasting must first be explained.

I. DEMAND MANAGEMENT

The purpose of demand management is to assign a priority to each single booking

request and to decide on this base whether a request is accepted or rejected. This is a

crucial task, because without it all incoming requests would be satisfied uncontrolled.

This may lead to the following consequences: 33

The incoming lower-value demand would occupy valuable seats at an early

stage of the booking process,

And therewith not spare capacities for the later emerging, higher-value

demand of business travelers.

The lower-value demand would consequently crowd out higher-value demand bit by

bit, resulting in suboptimal revenues:


0

20

40

60

80

100

120

140

52 48 40 32 24 20 16 12 10 9 8 6 5 4 3 2 1 0

De

man

d

Weeks before departure

450 €

200 €

60 €

FIGURE 14: COURSE OF BOOKING WITHOUT DEMAND MANAGEMENT

Demand: 120 Max.Cap.: 100


Julius Neubauer 21

That implies:

Hence it is economically reasonable to reject lower-value demand in order to reserve

the limited capacities given on a flight for higher-value demand.

II. DATA ACQUISITION AND FORECASTING

All instruments used by Yield Management require a well-founded data pool.

This data is gathered using computer-assisted reservation systems, then analyzed and

afterwards fed back in real-time again.

Such databases contain information about the following parameters: 34

Current bookings

Course of cancellations

No-show-behavior

Load factors

Development of costs and revenue

Competitive behavior

Seasonal influences

In tourism and aviation business the gathering of information is provided by computer-

assisted reservation systems like Galileo or Amadeus.

34 cf. Jörg Lindenmeier, Yield-Management und Kundenzufriedenheit: Konzeptionelle Aspekte und empirische Analyse am Beispiel von Fluggesellschaften, DUV-Verlag, 2005, Page 12

0

20

40

60

80

100

120

without DM with DM

Cap

acit

y (m

ax.

= 1

00

)

450 €

200 €

60 €

FIGURE 15: IMPACT OF DM ON THE REVENUE

13000€

2100€

22500€

7000€

900€

+100%


Julius Neubauer 22

physical compartment virtual compartment

First

Business

Economy

Forecasting now builds up on this pile of data to generate forecast models regarding

the following factors: 35

Future level of demand

Expected course of bookings

No-Show prospects

Go-show prospects

Cancellation rate

In command of this specific knowledge, we can now proceed to the next chapters.

III. ALLOCATION

The main task of allocation is the assignment (or combination) of available capacities

to different booking classes. Several different techniques can be applied for this

purpose, distinctive in their complexity and implementation possibilities in practice.

But the corporate objective remains the protection of fixed contingents for higher-

value demand. 36

The following techniques are widespread and applied in practice:

Limiting curves

Constant allocation

Nesting

Network YM - Virtual Nesting

To prevent misunderstandings, I would briefly like to explain the term „booking class“:

The available seats on an aircraft are generally divided into three compartments:

First / Business / Economy. Nowadays only two of them are offered on most

continental flights: Business and Economy. These physical compartments (generally

differing in comfort, space and on-board service provided) are now further divided into

several booking classes (also called virtual compartments). These virtual compartments

are simply different price ranges with a fixed contingent of seats within a physical

compartment.

35 cf. Weiß, Häußler, 2005, Page 9 36 cf. Weiß, Häußler, 2005 Page 9

Input for allocation

Input for overbooking control

FIGURE 16: SPLITTING OF PHYSICAL-

INTO VIRTUAL COMPARTMENTS

First

Business

Economy 1

Economy 2

Economy 3

Economy 4

Economy 5

Economy 6

First

Business

Economy


Julius Neubauer 23

0

1

2

3

4

5

6

7

8

52 40 25 15 10 5 3 1 0

Lo

ad

fa

ct

or


Upper limit

Lower limit

Actual demand

1. LIMITING CURVES

This technique has appealed to many companies. It forecasts the course of booking,

based upon statistics and courses of booking of past and present databases. This

results in an individual pattern for each single flight offered by an airline. To allow for

unpredicted random fluctuations in demand, so called “puffer zones” are taken into

account. The so generated limiting curves form the upper and lower limit of the actual

demand development. 37

The following figure shows a fully implemented limiting curve on a flight with 3

booking classes available:

The basic consideration of this concept is to make an intervention of humans

unnecessary until irregularities occur. This would be the case if the real curve of

demand moved outside of the forecasted limiting curves.38

37 cf. Weiß, Häußler, 2005, Page 13 38 cf. Sterzenbach, Conrady, 2003, Page 353

100%

52 40 25 15 10 5 3 1 0


Upper Limit

Lower Limit

Predicted course of booking

52 40 25 15 10 5 3 1 0Weeks before departure

Predicted course of booking

only 1st

class available

all 3 classes available for booking

1st

+ 2nd

class available

FIGURE 19: FULLY IMPLEMENTED LIMITING CURVE

FIGURE 18: CALCULATED PUFFER ZONES FIGURE 17: PREDICTED COURSE OF BOOKING

CALCULATED BY A FORECAST MODEL


Julius Neubauer 24

10

30

60

100

VC3

VC2

VC1

Total Capacity

This means:

If the demand bursts the corridor on the upper limit, this is a sign of very high

demand for available capacities. Should this occur, the lower-priced 2nd and 3rd

booking classes are closed. This from now on forces the customer to book the

only rate available. If the curve then evens out between the limiting curves, the

second class is made available for booking again.

If the corridor bursts on the lower limit, this indicates a very poor demand.

Airlines try to countervail this by opening all booking classes. This should

stimulate demand enough to settle down at a constantly increasing rate.

An important requirement for the proper use of this technique is the accuracy of

forecasts. The more inaccurate they are the wider or closer the gap will be between

the limiting curves. Both cases are not desirable. Regarding the first case, the margin of

actual demand would be too big and so the higher-value booking class would never

be exclusively available. Regarding the second case, real demand would often burst the

corridor on the upper or lower limit causing frequent changing of available booking

classes. This would negatively affect demand and considerably increase the

maintenance effort of such a system. Allocation using limiting curves however is very

popular since it is easily feasible and interpretable.

2. CONSTANT ALLOCATION

Static allocation is seen to be the assignment of capacities of similar kind to different

booking classes. This process is based solely on forecast models of demand for a

particular flight. With this technique the size of each contingent is not changed

anymore after being determined (it remains constant). Thus it is assured that

predetermined capacities are not exceeded

The biggest disadvantage of this technique is that the size of booking classes cannot be

adjusted according to demand. Likewise higher-value requests might be rejected if

there is no capacity available in the favored virtual compartment instead of sourcing it

out into other booking classes with capacity still available.

FIGURE 20: STATIC ALLOCATION OF VIRTUAL COMPARTMENTS (VC)


Julius Neubauer 25

This method of allocation is, due to its simplicity, the most widespread of all. But owing

to its lack of flexibility, it does not appeal to airlines. 39

3. NESTING

Nesting does no longer assign a constant size to virtual compartments. Instead of that,

each booking class is granted the access to lower-yield contingents (Also called the

integration of virtual compartments into each other).This means that if the capacity of

one specific booking class is depleted due to very high demand, it automatically

obtains access to yet unassigned seats of lower-yield virtual compartments. 40

Example:41

On a flight from Munich (MUC) to Dublin (DUB) 150 seats in all three virtual

compartments are available. The forecast model predicts the following level of

demand:

Five days before take-off the bookings are as followed:

Virtual compartment Total seats Actual demand Seats left

A 90 90 0

B 45 40 5

C 15 8 7

Total 150 138 12

If the 91st request for a seat in compartment A is received at that time, the booking

theoretically will have to be rejected due to insufficient capacities in compartment A.

But this proves to be absurd because the compartments B and C still have sufficient

unassigned capacities. Nesting now allows compartment A to access the capacities of

lower-yield compartments B and C. Consequently the request can be accepted

although the preassigned contingent of compartment A is already used to capacity.

That implies that virtual compartment A is able to use virtually all 150 seats on this

flight. But vice versa the compartment C has no access to B and A, though

compartment B to C but not to A.

39cf. Axt, 2004, Page 8 40 cf. Axt, 2004, Page 10 41 cf. Sterzenbach, Conrady, 2003, Page 354

Virtual compartment Predicted demand

A (Fullfare) 90

B (Eco) 45

C (Eco-special) 15

Compartment A (Fullfare)

max.

150

seats

Compartment B (Eco)

max.

60

seats

Compartment C (Eco-special)

max. 15 seats

FIGURE 21: BASICS OF NESTING


Julius Neubauer 26

4. NETWORK YIELD MANAGEMENT

Up to now, I have only focused on direct flights in this skilled work.

The route structure of an airline develops simultaneously to the continuous growth of

airlines to big international concerns and their permanent expansion to new markets.

The huge number of direct flights causes the route structure to become inefficient and

also very unclear. So there was need for action. The so called hub-and-spoke-system”

was invented and shortly after established by all major airlines.

Hub-and-spoke means that an airline transports its passengers coming from smaller

airports (so called spokes) to the big international ones (hubs) via small aircrafts

(mainly Boeing 737-200 and Airbus A310/20). There, passengers have to change to big

wide body aircrafts (mainly Boeing 747/77 and Airbus A340/80) in order to be passed

on to primary flight routes. Then, after landing on a hub again (mainly that of a partner

airline) the journey continues, after being reallocated to smaller aircrafts, to the

spokes. 42

This system dramatically increased the load factor within the entire route structure. At

the same time this made the process of allocation considerably more complex because

a route now consisted of multiple single flights instead of one direct flight.

This plus in complexity requires new, more efficient allocation solutions. Such that can

incorporate different combinations of airports of departure and arrival and the valence

of revenue streams linked to it.

42 cf. Weiß, Häußler, 2005, Page 15

FIGURE 22: HUB AND SPOKE SYSTEM

Spoke

Hub


Julius Neubauer 27

I. VIRTUAL NESTING

This technique combines all booking classes available within the entire route structure

to different categories. These categories are now called revenue classes and no longer

virtual compartments

This appears as follows:

The route Munich (MUC) – Dublin (DUB) via London (STN) can be booked as “direct”

flight (you have to change in STN), or as 2 single flights. The achievable revenues are as

follows:

Out of this it is evident that a passenger of the itinerary43 MUC-DUB (via STN) is

charged a higher price (called route contribution) than passengers of both single legs.

44 Based upon this, the passenger of the itinerary MUC-DUB (via STN) automatically

receives the tender, prior to the other two passengers.

Therefore the capacities for this itinerary and its legs would be nested as follows:

It should be noted that the offer MUC-DUB (via STN) consists of the simultaneous

booking of both legs (MUC-STN, STN-DUB). The price difference compared to the single

booking MUC-STN and STN-DUB is reached by discounts (because the allocation of

capacities can be improved when flights are booked simultaneously).

43 A route where you have to change the plane in order to reach your destination. 44 The several segments of an itinerary.

FIGURE 24: VIRTUAL NESTING FOR

MUC – DUB (VIA STN)

MUC - DUB (via STN)

MUC - STN

STN - DUB

FIGURE 23: VALUE OF DIFFERENT LEGS AND ITINERARIES

MUC

STN

DU

B

Revenue: 250€ MUC - STN

Revenue: 350€ MUC – DUB (via STN)

Revenue: 150€ STN - DUB


Julius Neubauer 28

0%

20%

40%

60%

80%

100%

120%

140%

160%

0 0,5 1 1,5 2 2,5 3 3,5 4

Load

fac

tor

Days before departure

0%

20%

40%

60%

80%

100%

120%

0 0,5 1 1,5 2 2,5 3 3,5 4

Load

fac

tor


B. OVERBOOKING CONTROL

To keep the load factor of flights as high as possible, airlines use controlled

overbooking. 45 This means that more seats are sold than actually available. This

becomes necessary due to-short term cancellations and no-show passengers that then

should be compensated through go-shows and overbooked capacities.

This approach requires very accurate forecast models. If the no-show and/or the

cancellation rate are calculated too high, too many passengers are at the gate waiting

for boarding (spill). In this case airlines have to reject passengers (denied boarding).

Compensations, costs issued by overnight stays, upgrades or rebooking to competitor’s

flights occur. This category of costs is called stock-out costs. If the rate of no-show

passengers and cancellations are calculated too low, this may result in unused

capacities. All costs caused by unused capacities are called deadhead costs.

So an airline can proceed in the following ways:

It can offer the flight without any overbooking:

The load factor curve clearly drops in last section due to frequent short-term

cancellations. This entails definitely no stock-out but high deadhead costs.

It can overbook the flight without restrictions:

The load factor curve will clearly burst the maximal capacity of 100% but not

drop low enough in the last segment to transport all booked passengers. This

approach ensures a high load factor, but entails significant stock-out costs.

45 American Airlines have detected that a non- overbooked flight has an average load factor of 85%.

FIGURE 25: LOAD FACTOR ON A NON-

OVERBOOKED FLIGHT

FIGURE 26: LOAD FACTOR ON A OVERBOOKED

FLIGHT WITHOUT RESTRICTIONS


Julius Neubauer 29

0%

20%

40%

60%

80%

100%

120%

140%

0 0,5 1 1,5 2 2,5 3 3,5 4

Load

fac

tor


It can apply an optimized overbooking rate, based on forecasts:

These forecasts include rates of cancellation, rebooking and go-show

passengers. This approach ensures a relatively high load factor, with the load

factor curve clearly bursting the maximal capacity, but still dropping back close

to it again. The difference of the two curves should then exactly be the amount

of no-shows:

The optimal overbooking rate can also be seen as a trade-off between

deadhead and stock-out costs:

The overbooking rate can be considered as optimal if the total amount of

costs caused by both deadhead as well as stock-out costs is as minimal as

possible. This means that bookings will probably be accepted as long as the

hence resulting revenue is bigger than the costs emerging if a customer has

to be rejected.46

The above mentioned optimized overbooking rate is influenced by several factors: 47

Historic no-show behavior:

Contains information about no-show rates of past flights. (same in route, day,

time and virtual compartment)

46 cf. Weiß, Häußler, 2005, Page 20 47 cf. Sterzenbach, Conrady, 2003, Page 348

FIGURE 27: LOAD FACTOR ON A FLIGHT WITH

OPTIMIZED OVERBOOKING RATE.

0 5 10 15 20 25 30 250 40 45 50

Co

sts

Overbooking rate in %

Deadhead costs

Stock-out costs

optimal

overbooking rate

FIGURE 28: CALCULATION OF

OPTIMAL OVERBOOKING RATE


Julius Neubauer 30

0%20%40%60%80%

100%120%140%160%

0 0,5 1 1,5 2 2,5 3 3,5 4

Load

fac

tor


Percentage of business and private travelers:

Due to the higher rebooking/no-show rate of business travelers, this has to be

taken into account. 48 The higher the percentage of business travelers on a

flight, the higher it is overbooked.

Number of flights per day:

The more flights per day are offered by an airline (having the same

destination), the higher each flight can be overbooked, because rejected

passengers then don’t have to wait a long time until the next flight takes off.

Remaining time until take-off:

The more time remains until take-off, the higher the overbooking rate. It then

declines by time elapsed. In this case, the overbooking rate is not statically

shaped (as in figure 25 to 27), but gradually. Figure 29 illustrates that:

In case a flight should be overbooked despite an optimized overbooking rate being

utilized, airlines apply a technique called „voluntary denied boarding”. This technique’s

aim is to encourage passengers to voluntarily renounce transportation if they are

awarded certain amenities. Such as upgrades to higher compartments of a later flight,

hotel vouchers or compensatory payments. 49

To sum it up, is to say that overbooking affects allocation. Thus the appliance of both

should be planned at the same time, which is very difficult to implement due to the

complexity of both. Therefore the optimal overbooking rate is first calculated in

practice as it provides the base for allocation.

48 To reduce the amount of passenger not showing up, many airlines conduct so called flight checks. In the course of a flight check, every single passenger is called and asked if he/she will definitely show up. 49cf. Sterzenbach, Conrady, 2003, Page 351

FIGURE 29: GRADUATED OVERBOOKING

RATE


Julius Neubauer 31

VIII. SOFTWARE - NAVITAIRE “SKY PRICE”

As already mentioned, IT-based Yield Management

Systems require for very sophisticated hard- and

particularly software solutions. Nowadays, many

airlines have decided to outsource these processes. This means that they acquire

the usage rights of a software and computing power offered by external companies.

The only thing they basically then have to do is integrating the software into

the existing IT-infrastructure and input the necessary parameters. Such solutions

are provided by several companies:

JDA Software Ideas Amadeus Sabre Lufthansa Systems PROS Revenue Management Systems, Inc. The Rainmaker Group Navitaire

1. COMPANY OVERVIEW50

Navitaire is a subsidiary company of Accenture, focusing its business on outsourcing

services for airlines. The Company started off as PRA Solutions in 1993. At that time it

offered revenue accounting solutions to major carriers. In the following years the

company developed the via World Network as a cost-saving alternative to other GDS

(Global Distribution System) systems like SABRE, Amadeus, Galileo and Worldspan

(merged in 2006). In 2000, Navitaire acquired the Open Skies airlines reservation

division from HP which is still in use today at major low-cost carriers like Ryanair.

Below you can see a short summary of Navitaire’s most important customers:51

50 cf. Company Overview, www.navitaire.com/company, As at 3.3.2009 51 cf. Customers, http://navitaire.com/company/customers_all.asp, As at 17.3.2009


Julius Neubauer 32

2. “SKYPRICE”

Navitaire SkyPrice is an integrated price

and revenue optimization system. It aims

at low-cost carriers offering several

booking classes that have no differentiation other than price. This challenges

traditional revenue management theory which is based on passenger segmentation by

fare classes and demands for new solutions. SkyPrice contains several algorithms and

forecast models that can manage pricing and allocation simultaneously.

SkyPrice is based on 3 stacks:

Optimization,

Analyzing

Integration

Optimization:

The optimization stack uses data collected by CRS systems to forecast parameters like:

Demand: The Software offers the possibility of involving special events,

holiday seasons and other influencing factors.

No-show rate: Offers the option of using only segment-specific data to gain

more precise forecasts.

The Optimization stack also calculates the size of virtual compartments and

overbooking rates by utilizing complex mathematical algorithms like EMSRb (Expected

Marginal Seat Revenue) developed by MIT. EMSRb enables airlines to optimize

revenues even further, but requires powerful IT infrastructure.

Analyzing:

SkyPrice provides information about cost structures, competitor’s prices compared to

yours and comprehensive access to all available flight data. It also enables you to easily

create performance reports and immediately share them within the entire company.

Integration:

One of the software’s aims is to flawlessly integrate itself into existing IT-infrastructure

and communicate with other components and allow for easy interaction via flexible

and simple user interfaces (UI).

All data that is processed by the software is stored in Navitaire’s data centers which

are located in Minneapolis, London and Sydney. That helps reducing maintenance

costs and increases security.


Julius Neubauer 33

IX. CONCLUSION

Yield Management is one of the most revenue-affecting processes in airline business.

The additional profit attributed to the implementation of Yield Management Systems

at American Airlines amounts to 500 million US-$ each year.

The future development of Yield Management particularly depends on IT-

infrastructures. The amount of decisions to be made by an integrated, IT-based Yield

Management System is enormous. This amount can be illustrated by the following

example:52 Lufthansa offers approximately 1500 flights per day. Each of them is split

into 15-20 virtual compartments nearly 200 times before take-off. Considering that a

flight is available for booking nearly one year in advance, this results in a huge

workload of the IT-based Yield Management But this amount will constantly increase

over the next years, which calls for very sophisticated hardware solutions.

Yield Management can also affect customer satisfaction, either by not accepting a

customer request or rejecting him shortly before take-off due to overbooking. But also

if he gets to know, that his seatmate has paid a much lower price than he did for one

and the same service. Therefore customer satisfaction should be valued more than

revenue maximization because without the former, the latter could never be reached.



Julius Neubauer 34

X. APPENDIX

Correspondence with Mr. Riess:

From: Riess, U. - VIEPV [[email protected]] Sent: Montag, 16. Februar 2009 08:56 To: Julius Neubauer Subject: RE: Anfrage Diplomarbeit Sehr geehrter Hr. Neubauer, Interessantes Thema das Sie sich da gewaehlt haben ! Unsere Niederlassung in Oesterreich ist ein integriertes Sales und Marketing Team, fuer Air France und KLM. Wir haben hier keine Ertragssteuerung in Wien, unsere Tarife werden von unserer Regional Direktion in Genf mit Paris und Amsterdam ausverhandelt, daher sehen wir hier kaum Mitarbeiter aus dem Yield Management, des jeweiligen Hauptbueros. Ich kann Sie in Evidenz halten sollten wir einmal einen Besuch in Wien haben, es ist jedoch so, das die Ertragsteuerung das Herz eines Unternehmens in der Flugbranche ist und es sich hier sicher um sensible Informationen handelt die nicht gerne nach aussen getragen werden. Die Basics nehme ich an sind Ihnen sowieso gelaeufig. Ich werde Ihren Kontakt und Ihr Interesse auch intern weitergeben Mit freundlichen Gruessen Udo Riess

From: Julius Neubauer [mailto:[email protected]] Sent: Sunday, February 15, 2009 5:21 PM To: Riess, U. - VIEPV Subject: Anfrage Diplomarbeit Sehr geehrter Herr Riess! Mein Name ist Julius Neubauer und ich bin Schüler des 5. Jahrganges an den Kärntner Tourismusschulen in Villach. Im Rahmen meiner Matura schreibe ich derzeit an einer Diplomarbeit welche das Thema Yield Management bei Fluglinien behandelt. In dieser Arbeit habe ich die Theorie des YM bereits umfangeich abgehandelt, es fehlt mir jedoch der Bezug zur Praxis, also wie YM bei Airlines zum Einsatz kommt. Deshalb habe ich von Frau Orasch vom Kärntner Reisebüro Ihre Kontaktdaten erhalten um mich mit Ihnen in Verbindung zu setzen. Nun wollte ich Sie fragen, ob Sie mir mit Informationen weiterhelfen könnten oder evtl. mit einem persönlichem Interview. Mit freundlichen Grüßen Julius Neubauer


Julius Neubauer 35

Correspondence with Mr. Juds:

From: Juds Benjamin [[email protected]] Sent: Mittwoch, 18. Februar 2009 15:53 To : Julius Neubauer Subject: AW: Anfrage wg. Diplomarbeit Hallo Herr Neubauer, wir benutzen das Navitaire Revenue-Management-System „SkyPrice“. Dies berechnet aus historischen Daten der für einen Flug festgelegten Referenzflüge (ähnliche Wochentage, Flugzeiten, Saisonalität, usw.) unterschiedliche Preis-Absatz-Funktionen im Zeitablauf, anhand derer dann die optimalen Preise im Zeitablauf und dementsprechenden Kontingente berechnet werden. Mit freundlichem Gruß, Benjamin Juds

Von: Julius Neubauer [mailto:[email protected]] Gesendet: Montag, 9. Februar 2009 14:50 An: Juds Benjamin Betreff: AW: Anfrage wg. Diplomarbeit Sehr geehrter Herr Juds, in meiner Arbeit habe ich die Theorie bereits umfangreich abgehandelt, es fehlt mir noch der Bezug zur Praxis! Also wie YM jetzt wirklich bei einer Airline angewendet wird, wie Sie zB: Überbuchungen handeln, wie die Überbuchungsraten festgelegt werden, mithilfe welcher Kriterien Sie Marktsegmentierung betreiben und in welche Segmente Sie einteilen, welche Methoden der Kontingentierung Sie anwenden etc.. Anmerken möchte ich noch, dass meine Arbeit nicht veröffentlicht wird, da es sich nur um einen Modul meiner Reifeprüfung (Matura) handelt. Vielen Dank für Ihre Bemühungen! Mit freundlichen Grüßen Julius Neubauer


Julius Neubauer 36

Air transportation numbers, provided by Statistik Austria (www.statistik.at)


Julius Neubauer 37

Passenger arriving in and departing from Vienna International Airport, provided by

Satistik Austria (www.statistik.at)


Julius Neubauer 38

A snapshot at European and north Atlantic transportation numbers, provided by

ICAO (www.icao.int)


Julius Neubauer 39

XI. BIBLIOGRAPHY

Air charter [Online] // en.wikipedia.org. - March 15, 2009. -

http://en.wikipedia.org/wiki/Air_charter.

Allianz (Luftfahrt) [Online] // de.wikipedia.org. - January 27, 2009. -

de.wikipedia.org/wiki/Allianz_(Luftfahrt).

An Introduction to Airline Economics, 6th edition [Book] / auth. O'Connor William E.. -

Connecticut, London : Praeger, 2001.

Betriebswirtschaft, Volkswirtschaft und gastgewerbliche Betriebslehre [Book] / auth.

Reith Wolfgang and Sator Manfred. - Wien : öbv&hpt, 2002. - Vol. 5.

Codesharing [Online] // de.wikipedia.org. - February 2, 2009. -

http://de.wikipedia.org/wiki/Codesharing.

Company Overview [Online] // www.navitaire.com. - March 3, 2009. -

www.navitaire.com/company.

Customers [Online] // www.navitaire.com. - March 17, 2009. -

http://navitaire.com/company/customers_all.asp.

Flag carrier [Online] // en.wikipedia.org. - March 15, 2009. -

http://en.wikipedia.org/wiki/Flag_carrier.

Fluggesellschaft [Online] // de.wikipedia.org. - January 26, 2009. -

http://de.wikipedia.org/wiki/Fluggesellschaft.

Introduction to oneworld.pdf [Online] // www.oneworld.com. - January 27, 2009. -

www.oneworld.com/content/factsheet/W1_2009-01-08 introduction to oneworld.pdf.

Luftverkehr, Betriebswirtschaftliches Lehr- und Handbuch, 3. Auflage [Book] / auth.

R. Sterzenbach and R. Conrady. - München : Oldenburg Verlag, 2003.

Revenue Management am Beispiel von Airline Revenue Management,

Hauptseminararbeit [Book] / auth. Weber Christoph. - University of Köln : GRIN-

Veralg, 2007.

Scheduled Air Transport [Online] // en.wikipedia.org. - January 26, 2009. -

http://en.wikipedia.org/wiki/Scheduled_air_transport.

Skyteam Fact Sheet [Online] // www.skyteam.com. - January 27, 2009. -

www.skyteam.com/downloads/news/facts/skyteamFactSheet.pdf.


Julius Neubauer 40

Staralliance Facts&Figures [Online] // www.staralliance.com. - January 27, 2009. -

http://www.staralliance.com/de/press/facts_figures/index.html.

Strategic Management for Travel and Tourism [Book] / auth. Evans Nigel, Campbell

David and Stonehouse George. - Oxford/Boston : Butterworth-Heinemann, 2003.

The Theory and Practice of Revenue Management [Book] / auth. Talluri Kalyan T. and

Ryzin Garrett Van. - Berlin : Springer, 2005.

Yield Management – Konzepte und Techniken. Studienarbeit [Book] / auth. Weiß

Matthias and Häußler Steffen. - University of Hohenheim : GRIN-Verlag, 2005.

Yield Management am Beispiel einer Fluglinie. Studienarbeit [Book] / auth. Fricke

Marco. - University of Hamburg : GRIN-Verlag, 2005.

Yield Management bei Fluggesellschaften. Hausarbeit [Book] / auth. Axt Martin. -

University of Eichstätt-Ingolstadt : GRIN-Verlag, 2004.

Yield Management und Kundenzufriedenheit: Konzeptionelle Aspekte und

empirische Analyse am Beispiel von Fluggesellschaften [Book] / auth. Lindenmeier

Jörg. - Berlin : DUV-Verlag, 2005.

Airline Yield Management

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