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Abstract
Yield management is a term for a set of strategies that enable capacity-constrained service
industries to realize optimum revenue from operations. The core concept of yield management
is to provide the right service to the right customer at the right time for the right price. That
concept involves careful definition of service, customer, time, and price. The service can be
defined according to the dimensions of the service, how and when it is delivered, and how,
when, and whether it is reserved.
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YIELD MANAGEMENT| Transport PolicySHAHID NASEM | IUBH, Bad Honnef
T a b l e o f C o n t e n t s
Yield Management Introduction........................................................................................................... 1
The History of Yield Management ........................................................................................................ 2
Yield Management Preconditions ........................................................................................................ 3
Product is Perishable ...................................................................................................................... 3
Can be Sold in Advance .................................................................................................................. 3
Capacity is Limited ......................................................................................................................... 3
Market can be Segmented............................................................................................................. 3
Variable Costs are Low................................................................................................................... 3
Demand Varies............................................................................................................................... 3
Overview Of Revenue Management System ....................................................................................... 4
Steps of Yield Management ........................................................................................................... 4
Data Collection ..................................................................................................................... 4
Segmentation ...................................................................................................................... 4
Forecasting and Estimation ................................................................................................... 4
Optimization ........................................................................................................................ 5
Dynamic Re-Evaluation ......................................................................................................... 5
How Does It Works?............................................................................................................................... 6
Market Segment Pricing ................................................................................................................. 6
Airline Industry Segmentation ............................................................................................... 6
Segmentation In Other Industries .......................................................................................... 7
Peak/Off-Peak Pricing .................................................................................................................... 7
Price Discrimination ....................................................................................................................... 8
Forecasting Demand ...................................................................................................................... 9
Inventory Allocation Basics .......................................................................................................... 10
Yield Management Benefits................................................................................................................. 11
Customer Expectations ................................................................................................................ 11
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Competitive Pricing ...................................................................................................................... 11
Market Segments ......................................................................................................................... 11
Company Divisions: ...................................................................................................................... 12
Yield Management Application Areas ................................................................................................ 13
Success Stories..................................................................................................................................... 14
Conclusion ........................................................................................................................................... 15
References ........................................................................................................................................... 16
T a b l e o f F i g u r e s a n d C h a r t s
Table 1: Airline Industry Segmentation ............................................................................................. 6
Table 2: Segmentation in Other Industries ....................................................................................... 7
Table 3: Peak/Off-Peak Pricing ........................................................................................................... 7
Figure 1: Price Discrimination ............................................................................................................. 8
Figure 2: Price Discrimination ............................................................................................................. 8
Figure 3: Price Discrimination ............................................................................................................. 9
Table 4: Inventory Allocation Basics ................................................................................................ 10
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YIELD MANAGEMENT| Transport PolicySHAHID NASEM | IUBH, Bad Honnef
Y I E L D M A N A G E M E N T I N T R O D U C T I O N
ield management is an approach used by many corporations (mostly airlines) to maximize
the profit in contrast to other profit raising techniques. Yield management is not about just
increasing or updating pricing. Companies applying yield management is vary from company but
they have to fulfil four conditions that we will discuss in next chapters.
Yield management is a science of maximizing profits by considering different steps like:
Market demand Forecasting Mathematical optimization of pricing and inventory
Yield Management is the process of understanding, anticipating and influencing consumer
behavior in order to maximize yield or profits from a fixed, perishable resource.
Another way of describing Yield Management is:
Selling the right product to the right customer at the right time at the right price.
In Yield Management we emphasis on setting the best price for our products to gain more
profit. Like in airline industry tickets for the same flight are sold on different prices subjected to
time until departure and remaining unsold seats.
Y
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YIELD MANAGEMENT| Transport PolicySHAHID NASEM | IUBH, Bad Honnef
T H E H I S T O R Y O F Y I E L D M A N A G E M E N T
The concept of Yield Management initiated by airline companies in the United States of America.
American Airline is the first airline to adopt this strategy. After 1978 congress passed the act of
Airline Deregulation. That was a huge shock for airline industry in the US. Everything was
completely changed because now airlines are free to choose their fares and domestic routes.
After that many new airlines jumped into the market and PeoleExpress, a small company with
very low fares, 50% to 70% lower as compared to bigger airlines. It was a big distress for major
airline because they cant compete with these low fares. They had to cover their huge
expenditures and they cant choose low fares to compete. That was a very crucial time. If they
decided to lower the fares it is going to lead them towards bankruptcy and if they go with higher
fares they are going to lose their passengers.
It appeared that there was no option to overcome this issue and American Airline is going to be
bankrupt in new deregulated environment. But Robert Crandall, former CEO of American Airlines
announced its Ultimate Super Saver Fares, just like PeoleExpress and in some cases even lower
with few conditions. American Airlines segmented the market with two classes and this is
considered to be the start of yield management.
With the passage of time many airlines and after many other industries like Hotels, Operas,
Restaurants, Car Rental companies start applying this approach to maximize profits.
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Y I E L D M A N A G E M E N T P R E C O N D I T I O N S
There are some preconditions for applying yield management system in any industry. Without
having these conditions it is not possible to apply yield management system.
1. Product is perishableThe product should be unpreserved able like you cant sale a seat after the departure of flight or
if a room is free for a day its not possible to get its rent on other day. But on other products like
cars, if you cant sale them in this week you can in upcoming weeks or even after a month.
2. Can be sold in advanceThe second condition is that you can sale your product in advance, like you can sale or book airline
tickets even months before flight or you can book a room months before arriving.
3. Capacity is limited (Hotel Rooms)Capacity should be limited, like in a plane you can carry only a limited number of passenger
depending on aircraft size, same you have limited number of room available in a hotel and limited
number of seats in opera or theatre. If you have unlimited capacity then it is not possible to apply
yield management.
4. Market can be segmented (Business Class and Economy Class)While applying Yield management you should be able to segment your product into different
categories, like in hotels you can book a luxury suit, may be a normal single or double room. Or in
airline you can book ticket with different classes economy, business or leisure.
5. Variable costs are low (Cost per Passenger)Flexible cost as per passenger because you are selling seats with different prices.
6. Demand varies (demand for train/air tickets travel is higher on seasonal holidays)Demand varies with different reasons and causes, like on seasonal holidays demand for air
tickets and hotel rooms is higher than usual days.
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YIELD MANAGEMENT| Transport PolicySHAHID NASEM | IUBH, Bad Honnef
O V E R V I E W O F R E V E N U E M A N A G E M E N T
S Y S T E M
Steps of Yield Management
1. Data Collection:2. Segmentation3. Forecasting and estimation:4. Optimization:5. Dynamic Re-evaluation
Now lets have a glance on thestructure of a yield management system, and how it works. Yield
management system calculates and updates the booking limits within a reservation system. The
yield management system goes through fowling steps:
1) Data Collection:Companies using yield management have to keep their historical data of customer conduct, fares,
demand and other factors for better forecasting and estimation. This is the groundwork of all yield
management systems. The more precisely we collect data the better forecast we can make.
2) SegmentationAfter gathering the relevant data, market segmentation is the key to market-based pricing and
revenue maximization. Successful application of yield management depends on your customer
segmentation on behalf of their responses on certain product prices based on time and place.
3) Forecasting and estimationWithin this phase we have to evaluate the factors of our model, and after that we have to make
forecast using these factors or parameters. Sometimes companies not only forecast demand, but
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no-shows, or cancellations too. We cannot optimize the controls without considering all the
factors involved.
4) OptimizationDuring the forecasting process we recommend that what customer are like to do and in
optimization we suggest how a firm should react to that. Optimization is about assessing multiple
options how to sell your product and whom to sell. We have to find the optimal set of controls
which we are going to use.
5) Dynamic Re-evaluationYield management needs that the organization must continuously re-evaluate their prices,
products and procedures to enhance yield. In the active market an effective yield management
system regularly re-evaluate the factors to move with the current market situation.
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H O W D O E S I T W O R K S ?
For the better understanding of yield management system process now we will look at examples
of following steps:
Market Segment Pricing Peak/Off-Peak Pricing Price discrimination Forecasting Demand Inventory Allocation Basics
Market Segment Pricing:
Airline Industry Segmentation
Characteristics Business Travel Leisure Travel
Advance Booking Booking close to departure. Booked well in advance of departure.
Stay at
DestinationRarely Include a weekend. Usually includes a weekend.
In airline industry usually we have two types of customers, one business travelers and second
leisure travelers. Business travelers usually book their tickets only few days before flight or
sometimes even few hours before departure. So they are willing to pay higher prices to meet their
demand. But on the other hand leisure travelers usually travel in vacations so they book their
tickets even months before, they are not bound of time and days so they get benefit of it and get
the higher discount based on how much advance they book the ticket.
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Segmentation in Other Industries
Industry Method of Market Segmentation
Freight Transportation Vary rates by commodity being shipped.
Health Care Time sensitive care vs. postpone able care.
Broadcasting Guaranteed spots vs. rotatable spots.
Utilities Urgent, non-discretionary service vs. non-urgent, interruptible
service.
Peak/Off-Peak Pricing:
In yield management we offer different prices on the basis of peak and off peak timings, prices
rises when the demand is higher and reduces during the period of slack demand. Like on
seasonal holidays prices of airline tickets and hotel rents are higher than usual days.
Industry Type of Discount
Air Travel Night Coach fares.
Car Rental/Hotel Weekend discounts in major cities (not resorts).
Telephone Companies Reduced long distance rates on nights and weekends.
Theaters Discounted Matinees.
Golf Discounted off peak tee times.
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Price Discrimination:
Yield management may involve price discrimination, but it does not have to. There are few graphs
to explain how price discrimination works. To keep the things simple and better understanding of
the model we take the unit cost same for all quantities.
Fig. 1
Fig. 1shows the pricing without any discrimination. The higher the quantity the lower the price
accordingly. But after a certain quantity company put more efforts on higher quantity but the
profit remains same. And before a certain quantity customer need to pay more price because
they are buying less quantity.
Fig. 2
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Fig. 2 shows price discriminations for some certain level. It is very basic model of price
discrimination. Deadweight loss is lower than previous model and customer surplus is also divided
into two part enhancing the better product pricing.
Fig. 3
Fig. 3describing an enhanced model of price discrimination. Profit margin is higher than before
and you can offer even better prices to you customers. Deadweight loss is minimal and customersurplus is divided into many parts. For a certain model this the best pricing you can get with yield
management.
Forecasting Demand:
Estimation and forecasting methods are dynamic components of both the price based and the
quantity based yield management systems.
Quantity based yield management we collect data from past and use time series methods to
forecast demand in future. In addition to demand, booking forecasting is also essential.
Cancellation and no show odds are also essential to calculate.
Price based yield management we predict the demand as a function of a variable, such as price or
promotion. These involve building forecasts such as market response or customer behavior at
certain price points. By relating these predictions a yield management System can then quantify
these benefits and develop price optimization strategies to maximize revenue.
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Inventory Allocation Basics:
Allocate inventory among price levels/market segments to maximize total expected revenue or
profits in the face of uncertain levels of demand.
Potential Customer Customer A Customer B Customer C Customer D
Price $100 $60 $80 $70
Probability 70% 100% 100% 100%
Expected Revenue for the unit $70 $60 $80 $70
10 Times $700 $600 $800 $700
Decision - Reject Accept Indifferent
We should never sell a unit of capacity for less than we expect to receive for it from another
customer, but if we can get more for it, the extra revenue goes right to the bottom line.
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Y I E L D M A N A G E M E N T B E N E F I T S
The benefits of yield management involves better capability to forecast customer requirements,
better pricing tactics, growth of markets and stronger association between the company divisions.
Customer Expectations:
Yield management provides better understanding of customersexpectations about product. The
research involved with yield management gives companies insight into the specific wants and
needs of their customers, and enables the company to shape the product and its presentation
more effectively. For instance, a hotel chain working on revenue management might discover that
their customers are typically business travelers who need easy access to the Internet. As a result,
the hotel chain might incorporate a policy providing free wireless internet in all hotel rooms.
Competitive Pricing:
Yield management support the company to build a competitive pricing approach that will provide
the company an advantage over its rivals. Yield management is so pervasive within certain
industries that companies failing to implement yield management strategies are unable to
continue competing effectively within the marketplace. For example, an airline might complete
research that shows customers who would otherwise be willing to fly are struggling with high
prices and extra fees. As a result, the airline can boost its competitive advantage by lowering
prices on certain flights or even by eliminating the baggage fees.
Market Segments:
Yield management seeks to show the company the full extent of its market segment and to
introduce the company to new market segments that are available. Companies that usually focus
on a certain market segment might need to expand their focus to continue growing in the
industry. For instance, a hotel chain that focuses primarily of business travelers might realize that
many of its chain locations are in destinations that have become popular family vacation spots.
As a result, the hotel chain can begin advertising to family travelers and making any necessary
adjustments in the chain locations, such as larger breakfast offering or play areas for children, to
encourage business from this market segment.
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Company Divisions:
Yield management creates a strong awareness between the activities of different company
divisions, and particularly the activities of those working on sales and marketing, and those on the
front line of service. Sales and marketing representatives must develop programs to reach out to
customers, but it is the service representatives on the frontline who are responsible for carrying
out many of these programs. Revenue management provides companies with the opportunity to
coordinate their divisions more closely and thus create the most effective programs possible.
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Y I E L D M A N A G E M E N T A P P L I C A T I O N A R E A S
Airlines Hotels Car rental Tour operators Cruise ships / Ferries Healthcare Amusement parks, golf courses. Theatres, Opera. Energy companies Advertising & TV
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S U C C E S S S T O R I E S
American Airlines increased annual revenue with $500 million through yield management Delta Airlines increased annual revenue with $300 million through yield management Marriott hotels increased annual revenue with $100 million through yield management National Car Rental was saved from liquidation with yield management Canadian Broadcasting Corporation increased yield $1 million per week
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YIELD MANAGEMENT| Transport PolicySHAHID NASEM | IUBH, Bad Honnef
C O N C L U S I O N
Yield management is a process that can significantly increase revenues of capacity-constrained
firms through better inventory management and pricing. By using yield management concepts,
these firms can protect premium inventory for sale at higher prices, stimulate market growth
by offering discounts and minimize wastage of perishable inventory.
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R e f e r e n c e s :
Revenue Management by Kristie Lorette
IATA Yield Management Program
Impact of Yield Management by Orreia Nunes Da Silva
Airline Revenue Management in a Changing Business Environment by Richard Klophaus
Implementing Revenue Management by Sevin Gken
Demand and Revenue Management by Anton J. Kleywegt
The End
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