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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
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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?