What is Yield Management?  Experienced overbooking by an airline?  American saved $1.4 billion from 1989 to 1992 (50% more than its net profit)  Management Science Technique to maximize revenue or profit  Started at American in early 1970s.  Decision Technologies Group  “Single most important technique since the airline deregulation” – CEO of American Airline

Components of Yield Management  Overbooking  Discount seat allocations  Management of traffic through hub airports

Overbooking  Passenger no-shows  Direct loss of $50 million for typical majors  Maximize passenger load factor by accepting reservations beyond seat capacity  MR vs. MC of accepting reservations.  Customer re-capture rate  Customer satisfaction  Linked with CRS (SABRE)  Sophisticated mathematical algorithm

Discount Seat Allocation  How many seats should be sold at reduced fare?  Major concept is to extract consumer surplus  Full fare vs. discount fare probabilities  Sell-up probability.  Remaining time till departure  Highest-revenue seats are always available  Stop selling discount seats when the MR of discount seat = expected future revenue of full-fare  Initiated by British Airways

Hub Traffic Management  Which flight combinations should be available and at what price?  Connecting passengers generate more revenues  Round-trip passengers generate more revenues  Seat allocation by fare must also be considered  Extremely complex problem, as there are very large number of possible combinations!!!  “Virtual Nesting” technique by American

Hub Traffic Management  Groups seats of different flights with similar fares (buckets)  Tickets sold only if all legs in the itinerary have available seats in the bucket of interest.  The highest-fare combinations are always available until flight closed.  Total of eight buckets are used by American  Mixed-Integer and dynamic programming techniques

Performance Measures  Method by American – Define the range of Best and Worst revenue (revenue opportunity)  Overbooking = 90% of revenue opportunity.  Seat allocation + traffic management = 50% of revenue opportunity

Future of Yield Management  Understand customer behavior  Customer choice model is particularly important.  Airline choice, fare-class choice, sell-up choice, airport choice, re-capture rate, reaction of bumping.  Combine current technique with customer behavior models to enhance revenues.

Discussion Questions  What is the goal of yield management?  As a passenger do you like yield management by airlines?  What are the disadvantages of using yield management?  What is the future direction of yield management? What additional factors should be considered?  Can the concept of yield management be applied to Supply Chain Management?