Airline Yield Management

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In This Issue: Airline Yield Management

The practice of Yield management has been widely adopted by service organizations in the past three decades. Yield management originally started in the airline industry and this capacity management strategy is also most often applied by airlines. The practice of yield management, especially in the airline industry, has been discussed in many different studies. There is, however, limited empirical research on the effects on business-to-business relationships and knowledge on how the feelings of price fairness affect loyalty. This article will discuss the differences in perception and reactions on both business and leisure travelers. The main goal of this article is to give answers to these questions: What is Yield management? What are the impacts of yield management in the airline industry on customer’s feelings of price fairness, its drawbacks, and benefits and how does it affect loyalty? Yield Management

There is a number of varying definitions of yield management used in academic research for different service industries. Wang and Bowie (2007) used the most comprehensive description: “The main target is to maximize revenue through the effective management of three main areas: pricing, strategy, inventory control and control of availability. The term yield management and revenue management are currently used synonymously.” This definition is also most suitable for the airline industry and will be used in this article. In that case, inventory controls depends on the available resources (employees, aircrafts and gasoline) to provide a specific service. The control of availability is the number of empty seats on board. It is understandable that firms take advantage of yield management practices. Kimes (1997) and Cross (1997) in Wang and Bowie (2007) shows that company’s revenue normally increases 3-7 per cent by employing yield management practices, which results in some cases in a 50-100 per cent increase in profit. This clearly indicates the usefulness and profitability of yield management strategies. However, these previous studies paid attention only to revenue growth. This is just an indicator for short term business performance instead of long-term customer value, which is more important factor for future business success.

Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profit from a fixed, perishable resource (such as airline seats or hotel room reservations or advertising inventory). As a specific, inventory-focused branch of revenue management, yield management involves strategic control of inventory to sell it to the right customer at the right time for the right price. This process can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so. Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it "the single most important technical development in transportation management since we entered deregulation." History

Deregulation is generally regarded as the catalyst for yield management in the airline industry, but this tends to overlook the role of Global Distribution Systems (GDSs). It is arguable that the fixed pricing paradigm occurs as a result of decentralized consumption. With mass production, pricing became a centralized management activity and customer contact staff focused on customer service exclusively. Electronic commerce, of which the GDSs were the first wave, created an environment where large volumes of sales could be managed without large numbers of customer service staff. They also gave management staff direct access to price at time of consumption...
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