Air Transport World

Keeping it in the black; managing revenue for fun and profit. (airlines using computers)

Keeping it in the black; managing revenue for fun and profit

Forget all the stuff we learned about yield management. It's passe. Airlines around the world are feverishly applying technology to fine-tune what now is variously called revenue management, revenue control, revenue optimization or revenue maximization.

One can understand why the carriers have sharpened their skills on the revenue side. The potential for dramatic new cost reductions seems to be a thing of the past. The airline trailblazer in two-tier wages, American, earlier this year made concessions in the concept. Fuel, for which U.S. airlines paid an average of 42.7^ in the first quarter and are using at an annual rate of 13 billion gallons, is increasing in price. Easy cost savings no longer exist.

But obtaining more revenue out of the daily ration of seats is not easy either. Across-the-board fare increases, a rather simple administrative task, are not a simple competitive one. Most of the time they don't work. So the airlines are trying to become smarter at squeezing incremental revenue from a seat here and a seat there, a flight here and a flight there, a market here and a market there. Since incremental revenue is mostly pure profit, it is worth chasing.

That means airlines must do several things more efficiently: (1) overbooking; (2) pushing fares on overbooked flights to the highest possible level; (3) boosting load factors on flights that aren't oversold and (4) managing route networks rather than route segments. The ability to accomplish these goals, which require creation and analysis of massive new data bases, is possible only through new computer software programs. The marketing departments of airlines are finally being given the sophisticated computer tools available long ago to the operations people.

The old yield focus, critics say, made much of the wrong target. A higher yield (revenue per passegner mile) on a segment isn't the same thing as earning higher revenue per trip. Today many flight segments are only one part of a passenger's trip that often requires flying through a hub. Thus a discount passenger who might produce higher total revenue dollars over a complete airplane trip, a so-called 0&D (origin and destination), may not be booked, while a local full-fare traveler representing comparatively higher revenue-- but for only a portion of that trip--is.

According to one Wall Street analyst, traditional yield analysis gives a false picture because of yet another factor. Since airlines are spending so much to get sales, by boosting commissions and other incentives (ATW. 1/87) actual yields are lower than reported yields anyway.

Managing traffic flows

"You can have high yields easily,' says Michael Maple, manager of yield sciences for Canadian Airlines International in Vancouver. "You just shut down sales' in a lower fare class while a chunk of the plane remains empty.

Joseph Lorenzo, president of Revenue Management Systems, Denver, says. "An airline does not manage its revenue generation by managing yield. Rather, an airline should manage its revenue by managing traffic flows, analyzing, evaluating and weighing the impact of alternative pricing and scheduling strategies, and deciding which strategies and attendant combination of traffic flows produce the most revenue. Such a system is more properly identified as a revenue management rather than a yield management system. …

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