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Yield Management Journal of Aviation/Aerospace Education & Research Volume 11 Number 1 JAAER Fall 2001 Article 6 Fall 2001 Yield Management Carlos Alberto Castro Pena Follow this and additional works at: https://commons.erau.edu/jaaer Scholarly Commons Citation Castro Pena, C. A. (2001). Yield Management. Journal of Aviation/Aerospace Education & Research, 11(1). Retrieved from https://commons.erau.edu/jaaer/vol11/iss1/6 This Forum is brought to you for free and open access by the Journals at Scholarly Commons. It has been accepted for inclusion in Journal of Aviation/Aerospace Education & Research by an authorized administrator of Scholarly Commons. For more information, please contact [email protected]. Castro Pena: Yield Management Yield Management FORUM YIELD WAGEMENT Carlos Alberto Castro Peiia HISTORY Historically, airlines have ope&ted in a tightly regulated environment. This environment has been regulated by governments and self-regulated through organizations such as the International Air Transport Association (KTA) The early airliie policy for the fare activities was based on offering all the seats on the airplane (or in the coach of the airplane) at the same rate. When the industry entered the 1960s with bigger and faster planes, new types of fares were being approved by the Civil Aeronautical Board (CAB) on certain routes, including lower-night coach fares, and tour-basing fares. There were no capacity controls on these fares. All of the seats were up for grabs and were sold on a first come, first-served basis, provided only that the conditions of the fares were met. By the end ofthe sixties, airliies were looking at day-of-week load factor patterns and introduced midweek and weekend fare dierentials to stimulate new demand for low load factor flights. High-season and Low-season differential fares were also in place. At the same time as these new fares were being implemented, the move toward deregulation of the economic aspects of the airline industry was gaining speed. By the mid 1970s the carriers were aware that deregulation was going to happen. Intra state carriers like Southwest Airlines in Texas and Pacific Southwest in California, which were not subject to federal fare regulations, were filling up their planes with a low-cost, low-fare product and making money doing it. This caught the attention of consumers, legislators and regulators alike. DEREGULATION established on a competitive basis. Inefficiency A revolution in the airline industry occurred with would not be rewarded with higher kesto cover airline deregulation. Deregulation began a series of events marginal routes. Instead, carriers could drop that changed forever the U.S. domestic airline industry and unprofitable routes. increasingly affects the airline industry worldwide. During -2. Commuter carriers could best serve low-density the evaluation of this new law or Deregulation as is known, markets. Smaller carriers with appropriate there was a good deal of controversy, Howard W. Cannon, equipment could better serve low-density traffic who was a United States Senator, and Alfied E. Kahn points than lager carriers, which received either a fonner Chairman ofthe CAB, had strong opinions in fhvor subsidy or higher hes to cover the costs of of Deregulation. Important elements of their testimony are serving such points. expressed below: Among the persons against of the Deregulation -1. The need for competition in the market~lace.The were George McGovern, former United States Senator and three forces of supply and demand in the market Albert V. Casey, former President of American Airlines, could do a better job of allocating resources than Inc. The following are important aspects oftheir testimony: a central authority. Artificial barriers to exit and -1. Regulation has served the vublic interest as well entry fiom the market would be eliminated, as the interests of the carriers. Regulation has encouraging new firms to compete and fixes to be checked the forces that might create extreme JAAER, Fall 2001 Page 7 Published by Scholarly Commons, 2001 1 Journal of Aviation/Aerospace Education & Research, Vol. 11, No. 1 [2001], Art. 6 Yield Management competition on the one hand or monopoly on the power over air fieight rates by that date) Although other. Evidence of success is the fact that the rise the carriers still maintain a private system of in passenger fixes over the years has been lower passenger and air fieight taris, the old system of than the rise in the Consumer Price Index. tariff filling and the lengthy approval process have -2. Unbridled com~etition would result in only been abolish. ternDorarv allocative efficiency. Carriers would 4. Federal ~reem~tion.Until the 1978 act, there were undercut each other's Ewes with the eventual no federal statutes preempting state economic result that only the larger companies would regulation of air transportation. The new law survive (survival of the fittest). Fares would then provides that no state or political subdivision and rise when few competitors remained in the no interstate agency may enact or enforce any law market. I or regulation concerning rates, routes or services -3. Smaller communities might lose service. of any carrier to provide interstate air Commuter carriers might not be willing or able to transportation. The intent here was to preclude the serve some markets. Furthermore, the community possibility of having 50 CABS. might not accept them once the established carrier One ofthe most tangible results ofthis revolution dropped service. was an explosion in the number of fixes offered in the When Deregulation did happen it changed the industry in marketplace. Fare aspect was a very critical area for airline important ways: growth, and the lack of technology had a direct effect on -1. ' Route entry. On January 1, 1982, the CAB lost We policy. For instance, fires were published in books virtually all of its control over entry into the air which reservations agents used to identi5 the appropriate transportation business or entry by carriers intro Wes for a given markets. Because the pricing of an new markets. Under the new law, a certificate is itinerary was manual, rules and hres had to be relatively still required, but it has generally been fieely simple. Also, because the books had to be printed and given, regardless of the statutory fitness standard. distributed, fixes could not change very often. With the However, despite the ict that carriers have picked advent of Computer Reservation System (CRS) and its up a number of formerly dormant and other new cousins the Global Distribution System (GDS) tariff books certificates in the past five years, very few ofthese became a thing of the past and prices could change very certificates have been utilized. The economic rapidly. recession in the early 1980s unquestionably, was In this time of period (1970s), the demand for a major fbctor. more discount fire products increased dramatically. The -2. Route exit. The revised law allows the air carriers Civil Aeronautical Board responded by easing regulations much greater flexibility in dropping markets than for charter airlines, and opening the way for several new 1958 act. Which mandated and extensive CAB types of charter products. However, discount kes for approval process. Under the revised law, a carrier scheduled airlines were still highly restricted and limited to has only to give the CAB 9O-days' notice of its certain markets. The charter airlines began to offer what intention toexit a particular community. However, were called "public charters" that would enable them to sell during a 10-year transition period, the CAB (and seats on what amounted to quasi-scheduled service. the department of transportation after 1985) has The threat of the public charter was a matter of been given the power to require the last carrier great concern for all scheduled airlines. When the airlines serving a community to maintain what is called reached the point where they could no longer reduce costs, "essential air service" until a suitable replacement they returned to the search for better technology. However, carrier can be found. Congress also guaranteed no airline was completely prepared for the scope of changes subsidy to provide service to such communities if caused by deregulation to the pricing environment. needed. The airlines developed new procedures and -3. Rates and Fares. As of January 1,1983, the CAB technology in order to be the largest carrier. Many wanted effectively lost all of its authority over airline to become not only a national carriers, but an international passenger fires (it already had lost most of its one as well. Each wanted to be the airline of the business Page 8 JAAER, Fall 2001 I https://commons.erau.edu/jaaer/vol11/iss1/6 2 Castro Pena: Yield Management Yield Management traveler. Everyone tried to out-do the other to attract this the right price at the right time. customer, including fkequent flier programs, special The inventory seat method became a system, and privileges for high-mileage travelers and new aircraft. The it was Bob Crandall who is credited for giving this, the new aircraft were a critical part of this growth. Customers initial inventory management process a formal name. He clearly preferred new to old, or so management hoped. One thought, the term, 'veld" was commonly used to measure ofthe most worried airlines in this new environment was revenue per passenger mile, so, recognizing that the seat American. Years later, American CEO, Bob Crandall, who allocations aflkted the passenger yield, Crandall decided was the Senior Vice-president-Marketing fbr the airline, to call it "Yield Management". explained the mood "This was driving us crazy. They were YIELD MANAGEMENT going to fly from New York to California for some amount Despite widespread allegations that deregulation of money that was a hell of a lot less than we had to resulted in billions of dollars in consumer saving, the truth charge." He was talking, ofcourse, about the bublic charter.
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