Abstract
The Yield & Revenue Management began its steps in the industry area, today the techniques to determine prices and increase profitability have changed a lot, forecasts, environmental analysis, segmentation, among others are some of the common practices in the departments Yield & Revenue Management around the world. Here we analyze how low cost airlines perform this function and some differences between Yield Management and Revenue Management.
1.- What is Yield & Revenue Management?
"Sell the right product, to the right customer, at the right time."
Yield & Revenue Management is the technique used by some companies that want to optimize their profits, through price variations, through extensive knowledge of the market that allows segmenting it, manipulating demand and the time in which sales are made. It is undoubtedly one of the instruments with the greatest power to influence company results and consumer decisions. Achieving this objective requires a very complex analysis, since a large number of variables are involved simultaneously. In general terms, Revenue Management is applicable provided the following conditions are met:
- Perishable product
- Short sales horizon
- Price sensitive
demand - Seasonal demand
The demand for and the supply of many services and products fluctuate significantly over time. Adopting a dynamic pricing approach that adjusts to fluctuations, particularly for those companies that sell perishable goods or services, subject to seasons, is one technique that can cause a significant increase in profits.
There are state-of-the-art software for this type of pricing policy, called Revenue Management. In a sentence, it is about raising prices when demand exceeds supply, and lowering them when the opposite occurs.
According to the American Hotel and Lodging Educational Institute's, Revenue Management is "a number of strategies and tactics aimed at maximizing income, with the aim of increasing profits in certain businesses."
2.- History of Yield & Revenue Management
On October 24, 1978, the commercial aviation industry changed radically. Previously, it seemed like a public service, since a government agency, the Civil Aeronautical Board (CAB), determined the routes, frequencies and rates that airlines could charge. The turning point was the Air Transport Deregulation Law passed by Congress.
Faced with the price war that led to the deregulation of the airline industry, there were only 2 options: get into the war or revolutionize management techniques.
Robert Crandall, President of American Airlines (1980-1998), started Yield Management practices. It was in 1982 when he took office and with incredible vision and strategic thinking, he launched a series of measures to alleviate the effects of the stiff competition from companies such as the new People Express. Crandall was the forerunner of the first airline industry loyalty program, AAdantage and the first GDS: SABER, and the first Yield Management techniques. His famous phrase "If I have 2,000 passengers and 400 prices on a route, obviously, 1,600 prices are missing" a customer, a price.
The Yield Management is to vary prices for better profit according to seasonality and type of product. Years later, this technique was added to market segmentation, macro and micro economic analysis, detailed study of the competition and something very important, the forecast for the occupancy of the aircraft seats and the term was modified and began to call Revenue Management. Yield Management is a fundamental part of Revenue Management, but as already mentioned, the latter works with forecasts and market studies more advanced than Yield Management.
3.- Importance of Yield & Revenue Management
With suppressed demand, if there were a general increase in prices it would be difficult to sell to an audience that has more and more options. A more suitable path was the one found by airlines during the 1980s by openly offering lower fares to those who bought earlier and higher to those who made reservations on dates closer to the flight departures. This improved sales and kept rate growth.
Revenue Management models have become more sophisticated over time with the aim of maximizing the results of the airlines in each journey, especially with the pressures on costs that have been registered in recent years. They have also contributed significantly to predicting with more certainty the effective demand for tickets to each destination in high seasons and thus allowing airlines to have backup flights if necessary and to make variations in fares according to expected sales.
The highly competitive state of the world economy means that this tool, which emerged from applications related to airlines and hotels, is now incorporated in many ways into the thinking of managers of companies in other sectors such as car rental, restaurants and others.
4.- What is a low cost airline?
A low-cost airline (also called a low-cost carrier, low-cost airline or no-frills) is an airline that generally offers low fares in exchange for eliminating many of the services to passengers. The concept emerged in the United States in the early 1990s. Originally the term was used within the aviation industry to refer to companies with low or lower operating costs than those of the competition. Through the media, the meaning changed and now defines any airline in which little money is required and which provides limited services. Southwest Airlines in the United States was the pioneer in the low-cost model, and European low-cost airlines such as Ryanair, Vueling or EasyJet have followed its strategy, which can be summarized in the following points:
- Greater number of people sitting on the plane.
- Unnumbered places. Passengers sit where they choose, this speeds up boarding.
- A fleet made up of single-model aircraft, generally the Airbus A320 or the Boeing 737. This reduces training and service costs.
- Direct reservation system (internet / call center - avoiding fees and commissions from travel agencies and computerized reservation systems).
- The "free" catering on board, disappears or becomes paid. This represents additional revenue for the airline.
- A simple Yield & Revenue Management system.
- Use of secondary airports, cheaper and less congested. This avoids delays due to traffic and takes advantage of the lower landing charges at these airports.
- Short flights with many frequencies. A plane of a low-cost airline usually flies around 11 hours, while an equivalent one of a full-service airline flies less than 8 hours.
- Employees work multitasking. For example, there are flight attendants who also clean the plane or control the entrance at the boarding gate, thus reducing personnel costs.
Successful low cost airlines are more profitable than full service airlines, for example Ryanair has a market capitalization of £ 3 billion of Operating Margins per airlines (1999).
5.- How Yield & Revenue Management works in low-cost airlines
As mentioned before, airlines were historically the first of the sectors to specifically use this methodology. The models have become more sophisticated over the years. The original purpose was to increase the load factor of the aircraft from destination.
Low-cost airlines currently apply one of the simplest Yield Management models and very similar to the one that was applied from the beginning by airlines such as American Airlines. It consists of establishing differential rates that privileged those who make firm reservations several weeks or months in advance, then the rates of customers who generate reservations a few days before the flight date are increased, and in some cases they are settled at very low prices. under the last available seats (last minute offers). Finally, and roughly, considering the more or less consistent percentage of passengers who do not board the flight despite having reserved their seat (the "no shows"), flights tend to be oversold.
Arriving at these prices is done taking into account several factors such as: the day and time of the flight's departure, a flight that leaves on a Friday afternoon where there is more influx of holiday tourists is not the same as one on a Friday morning. The events that may be taking place in the destination city, for example: most flights to the city of Berlin during LoveParade increase in price, due to the influx of people who are expected to arrive in the city on those days. The prices of the competition. Reservations that are already confirmed for that journey on that day and at that time. The airplane seat occupancy forecasts for that route.
The typical customer segment for early rates turn out to be vacation tourists in the vast majority of cases. The mid-to-rising price customer segment is comprised of individuals who value the convenience of late and / or flexible plans, or business travelers who value the convenience of departure on a more rigid date.
Finally, the last minute offers generated a new segment in which travelers approached the airport to "be surprised" and leave for the destination whose availability and low price suited them best. Thus, it is very difficult for two seatmates to end up paying similar fares for the same flight.
Let's see an example, with the following path:
9.- Bibliography
Baños, A. (2005). Pricing: the new tool for business profitability, http://www.gestiopolis.com/pricing-como-herramienta-para-la-rentabilidad/
Crandall, R. (2004). 57th annual wright memorial dinner remarks of robert l. Crandall retired chairman American Airlines, http://robertcrandall.com/
Pak, K. and Piersma, N. (2002), Airline Revenue Management: An overview of OR techniques 1982-2001, Erasmus Research Institute of Management (ERIM), REPORT SERIES RESEARCH IN MANAGEMENT
Landman, P. (2010). XOTELS, Managing Price Sensitivity in Hotels: Last minute Deals vs. Early Bird Offers,
