Yield Management in the Airline Industry

Abstract

"This is it! This is arshot across our bow! If we don't invent a way to deal with (yield management), we're history!" -Donald Burr, Former CEO of People's Express Immersed in the age of the internet, most prospective travelers have searched for, and have purchased airline tickets online. In doing so, a varying range of prices and restrictions were inevitably discovered. One week, a roundtrip ticket on a given flight may be quoted at $280, a week later at $360, and a week prior to the flight, $840! The constant fluctuation in price is due to the practice of yield management, sometimes referred to as revenue management. The airline industry was the fust to develop and implement this system, and its use has resulted in substantial revenue gains for the industry as a whole. The purpose of this paper is to examine the history of yield management in the airline industry, and to exemplify its utilization and importance as the most influential practice developed and implemented in the post-deregulation era of the airline industry. Beginning with a historical summary, this paper will present the progressive development of yield management, discussing the roles of the Sabre reservation system, DINAMO, and Sabre AirMax@. Furthemore, this paper will present the fundamentals of demand, a working definition of yield management, the features common amongst industries utilizing yield management systems, and the strategies of overbooking and discount seat allocation. Some of our time will be spent solving a common yield management problem as a means of displaying the quantitative nature of the practice. To finish, the paper will conclude with a presentation of the challenges that continue to hinder yield management systems today. To provide some historical perspective, yield management arose out of airline deregulation in 1979. In the 19607s, American Airlines developed the first on-line reservation system named Sabre (Semi-Automated Business Research Environment). The Sabre reservation system dealt with centralizing and controlling reservation activity (Voneche). By deregulation, Sabre was overflowing with priceless historical data from over ten years of bookings. As competition intensified in the post-deregulation era, Robert Crandall, the former CEO of American Airlines, set out to devise a system that would vary the proportion of discount and full-fare seats on a day by day, departure by departure basis (Petzinger, 303). The Sabre system provided the platform for designated American Airline's employees to monitor the rate of actual booking in various fare categories, to compare them to the predicted rate, and then adjust the inventory of variously priced seats accordingly (Petzinger, 304). Crandall would later name this process "yield management." The yield-management process has developed considerably, becoming almost exclusively automated. By 1988, American Airlines fully implemented Dinamo (Dynamic Inventory and ~ainknance Optimizer), a module that aggregates overbooking, discount allocation, and traffic management (Voneche). As a result of the Dinamo implementation, calculated spoilage was estimated at only 3%, and Yield-Management Analyst production increased by 30% (Voneche). Analyst production increased because these specialists could make better revenue decisions, as the job transitioned to Dinamo identifying the problems instead of the Analysts, and the Analysts would fix the problems with the help of software that allows for flight specific analysis and re-optimization (Voneche). Today, Sabre Airline SolutionsTM boasts the Sabre AirMax@ as the most current form of automated yield management. Sabre AirMax0 supports the entire range of yield management applications, including reservations data collection, offline data collection, forecasting, overbooking, optimization, performance measurement, and reporting JAAER, Spring 2005 Page 11