YIELD MANAGEMENT IN THE AIRLINE INDUSTRY

•  Originally as an airline industry concept

•  Adopted by service organizations across all spheres

•  Limited research on its exact effects on business-to business relationships

•  Limited knowledge about how feelings of price fairness affect loyalty

YIELD MANAGEMENT

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The main goal of yield management is to maximize the revenue with the help of effective management of three essential domains:

•  Pricing strategy

•  Control of availability: total number of empathy seats on board of the aircraft

•  Inventory control: depends on the availability of resources such as aircraft, gasoline and employees

DEFINITION by Wang & Bowie

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•  Most airlines who began to practice the concepts of yield management saw a direct increase of 3-7% in revenue

•  Success cases: American Airlines, Delta, Marriot Hotels, among others

•  Also used by travel agents who used it to generate the maximum possible revenue from their holiday packages

PROFITABILITY

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So how does the yield management

system work?

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EXAMPLE

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A flight that has two fare buckets: discount price and full price. The flight has 200 seats that are available for an early morning flight on February 16th. The flight should easily be able to sell off all seats at a discounted price, but it understands that an increasing number of customers will be willing to pay full price for seats as February 16th gets closer. To make things easier, we further assume that the leisure demand occurs before business demand. The next thing to do is to determine how many seats the airline should sell at leisure fare and how many seats should it protect for people who would pay full price. If the airline ends up protecting too many seats, it faces the risk of flying with empty seats. On the other hand, if very few seats are protected the airline might end up losing out on extra revenue that is usually generated from the business fliers.

In order to differentiate between the two groups, the airline often introduced barriers or “fences” between the two market segments. For example, the airline might phase in the full fare seats as the flying date gets closer and phase out the discounted seats. Since holiday fliers are expected to reserve their itineraries in advance, they are more than likely to make the most of the discounted fares. On the other hand, a majority of the business trips are decided within a week or two from the date of travel. This allows the airline to collect full fares from business fliers. The same example can be used in the case of a hotel - read it here!

EXAMPLE

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How does it impact on customer feelings

of price fairness and customer loyalty?

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IMPACT

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•  Customers consider the price to be unfair when they realize that the airline is using price strategies to generate profit

•  Ends up having a negative effect on leisure travelers because business travelers are less price sensitive

•  Price fairness is not a proper predictor of loyalty, there are other factors at stake

ULTIMATELY…

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•  Yield management works best in situations where demand exceeds supply

•  It allows the industry to choose the demand it wishes to address in order to maximize the revenue

•  However these systems can also be used when supply exceeds demand to phase out bookings in a manner that allows the company to achieve the best possible revenue generation, given its constraints

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