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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

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

slide2

Components of Yield Management

  • Overbooking
  • Discount seat allocations
  • Management of traffic through hub airports
slide3

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
slide4

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
slide5

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
slide6

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
slide7

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
slide8

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.
slide9

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?
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