When you log onto an airline’s website and look up a pair of cities and the dates that you are looking to fly between them, the web of possible ticket options that you typically encounter is the product of dozens of computer algorithms and human employees working together to try and squeeze as much revenue
as possible out of each passenger. This complex process, through which airlines attempt to carefully balance the forces of supply and demand to capture the highest amount of revenue possible, is known as yield management.
Financial models, algorithms, and ticket pricing strategies are among the most closely guarded trade secrets by any airline, and yield managers (or revenue managers as they are more commonly referred to) have the difficult task of staying one step ahead of the competition when it comes to capturing as much passenger traffic as possible at the highest price available. As a result, airlines will very closely guard their yield management secrets, and these operations often go undiscussed.
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Yield managers have a very complicated task
At the end of the day, the success of an airline comes down to two key categories: revenues and costs. An airline can be pretty sure what its costs will be, and the decisions regarding how much an airline will spend in different categories are made by upper-management officials, except for some variable costs like fuel.
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However, when it comes to revenue, airlines are in a much less certain position, and they cannot always tell exactly how many tickets and at what prices they will be able to sell, requiring active and dynamic management of ticketing schemes. Today, yield managers have the even more complex task of managing the prices of airline tickets both in terms of dollars, but also in terms of airline miles, which are increasingly used to book flights. Let’s take a deeper look at the unique role that yield management plays in the industry today.
What exactly does a yield manager do for an airline?
According to Dartmouth’s Tuck Business School, yield management is a complex process of managing customer bookings that is used across the travel and tourism industry. Everything from hotel chains to ski resorts uses dynamic pricing systems to try and get as much revenue from each passenger as possible.
The goal of yield management systems is to allocate a company’s limited resources among different customer segments based on their willingness to pay, to get each customer to pay the highest possible price. Airlines can use a variety of tricks to segment their passenger segments, which include everything from business travelers to everyday vacationers looking for a bargain.
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An airline’s approach to yield management is similar to that of a hotel, as it offers a perishable good (a ticket has no value as soon as the boarding door closes) and it faces uncertain demand. Yield managers will often use booking rules, such as minimum stay requirements or advanced purchase restrictions, to segment vacationers away from high-value business travelers.
Carriers dynamically adjust prices and capacity based on demand patterns, allowing them to maximize revenue while minimizing associated risks. These yield management strategies have proven critical elements of airline revenue generation, and they are increasingly more complex as carriers navigate the dynamic world of third-party travel agents and online travel platforms.
How successful has yield management been?
Over time, the effectiveness of yield management has been confirmed extensively by industry research. According to a study from Travel, Technology & Solutions, yield management systems increased revenue generation by around 3-7%, with some more robust cases demonstrating an increase of far beyond this amount, resulting in profitability increases of beyond 50%.
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American Airlines reportedly accredited advanced yield management policies for revenue increases of around $500 million per year, and Delta also indicated that such practices increased its revenues by around $300 million per year, according to the same report. While airlines have achieved extensive success through the use of yield management systems, hotel chains have also found success through the practice. Marriott Hotels credited the practice with generating additional revenues of over $100 million per year.
Next-generation yield management systems remain in development
The future of yield management will undoubtedly involve the inclusion of next-generation systems, such as the increased use of Artificial Intelligence and Machine Learning algorithms. Modern yield management systems utilize these tools to perform predictive analytics and forecast demand, allowing yield managers to adjust prices efficiently.
An additional abundance of consumer data in the market allows airlines and their yield management systems to better predict demand and evaluate competitor pricing strategies. New algorithms can also identify shifting market conditions in real-time, and immediately concoct the best responses to any move made by a competitor, according to GlobeAir.
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What’s the bottom line with yield management?
At the end of the day, yield management systems are one of the best ways for airlines to stay ahead of the competition, and carriers that are better able to read and predict the forces of passenger supply and demand will undoubtedly be more equipped to optimize revenue generation strategies. As the world of travel booking becomes more complicated, yield management tactics will only continue to evolve.