Lesson 1.1 The Birth of Yield Management

Summary

This lesson explores the origins of revenue management, starting with its development in the 1970s airline industry. Ken Littlewood's mathematical approach to pricing led to yield management, which maximized revenue by varying seat prices. The 1978 Airline Deregulation Act intensified competition, prompting American Airlines to pioneer yield management technology. Their system forecasted demand, optimized pricing, and increased profits by 48%, setting a precedent for dynamic revenue optimization strategies.

Takeaways

• 📚 Revenue management has its roots in the airline industry in the early 1970s.
• 🧮 Ken Littlewood developed a formula to evaluate pricing strategies at British Airways.
• ✈️ The 1978 Airline Deregulation Act in the U.S. led to increased competition and the birth of yield management.
• 💹 Yield management aims to maximize revenue and profit by selling seats at different prices or promotions.
• 🤖 American Airlines was a pioneer in using technology for yield management, focusing on forecasting, inventory control, and overbooking.
• 🚀 American Airlines' yield management system led to a 48% increase in profits.
• 📈 The system forecasts demand and anticipates empty seats by analyzing data.
• 🎯 Optimal rate positioning and offer creation are dynamic and regularly re-evaluated.
• 🚫 Offers are restricted to target specific segments to avoid revenue dilution.
• 🛫 Yield management maximizes revenue per available seat.

Q & A

What is the main focus of Lesson One in the transcript?

Lesson One focuses on the history of revenue management, its origins, the problem it was designed to solve, its first application in the hospitality industry, and the levers and processes involved.

In what industry were the earliest principles of revenue management developed?

The earliest principles of revenue management were developed in the airline industry in the early 1970s.

Who is credited with creating a formula to evaluate the performance of special rates versus regular rates?

Ken Littlewood of British Overseas Airways Company, now known as British Airways, is credited with creating such a formula.

What was the impact of the 1978 Airline Deregulation Act on the airline industry?

The 1978 Airline Deregulation Act led to an unprecedented competitive environment in the airline industry, resulting in less controlled fares and more complex pricing structures.

What does yield management refer to in the context of the airline industry?

Yield management in the airline industry refers to the practice of maximizing revenue and profit by selling different seats at different prices or through different promotions.

Which airline was a pioneer in investing in technological approaches to manage yield?

American Airlines was the main airline that invested in technological approaches to manage yield.

What was the objective of the yield management system implemented by American Airlines?

The objective was to maximize profit by increasing revenue through inventory control and related data analytics.

What was the 'ultimate super saver' rate launched by American Airlines in 1985?

The 'ultimate super saver' was a non-refundable advanced purchase rate for trips involving a Saturday night stay over and subject to controlled capacity.

How did the yield management system help American Airlines increase its profits?

The system helped by forecasting demand, anticipating empty seats, and testing the optimum rate positioning of offers to create incremental revenue.

What was the result of implementing yield management practices at American Airlines?

American Airlines saw a 48 percent increase in profits over the next years due to the implementation of yield management practices.

How did the yield management system ensure that revenue was not diluted?

The system ensured that revenue was not diluted by fencing offers in terms of restrictions, targeting specific segments of passengers with similar behaviors.

Outlines

00:00

📚 Introduction to Revenue Management

Lesson one delves into the history of revenue management, explaining its origins and development. It highlights the key inventors and the problems they aimed to solve. The lesson also covers the first applications of revenue management in the hospitality industry. It introduces the concept of revenue management levers and processes, emphasizing their evolution over time. The earliest principles of revenue management are traced back to the airline industry in the 1970s, where basic mathematical models were used to optimize pricing. Ken Littlewood's formula for evaluating special rates is mentioned as a precursor to modern revenue management systems.

🛫 The Birth of Yield Management

The 1978 Airline Deregulation Act is identified as a pivotal moment that led to increased competition and complex pricing structures in the airline industry. This act spurred the development of yield management practices, which aimed to maximize revenue and profit by selling seats at varying prices or through different promotions. American Airlines is noted as a pioneer in this field, investing heavily in technology to develop forecasting, inventory control, and overbooking capabilities. The implementation of a company-wide yield management system allowed them to increase revenue through dynamic rate positioning and targeted offers. The success of American Airlines' yield management system is evidenced by a 48% increase in profits.

📈 Demand Forecasting and Revenue Optimization

American Airlines' yield management system is further explored, detailing how it used data analytics to forecast demand and anticipate empty seats. The system tested various rate positioning strategies to create incremental revenue, with a focus on optimizing offers dynamically and regularly. The strategy included restricting offers to target specific segments of passengers, such as those traveling during a specific period, to avoid revenue dilution. The result was a maximization of revenue per available seat, showcasing the effectiveness of yield management in the airline industry.

Keywords

💡Revenue Management

Revenue management is a business strategy used to optimize revenue by controlling the price and availability of a product or service. In the context of the video, it refers to the practice of maximizing revenue in industries like airlines and hospitality by using data analytics and strategic pricing. The video explains that revenue management was first applied in the airline industry in the early 1970s, where basic mathematics were used to rationalize pricing.

💡Ken Littlewood

Ken Littlewood is mentioned as an individual who contributed to the early development of revenue management. He worked for British Overseas Airways Corporation, now known as British Airways, and developed a formula to evaluate the performance of different pricing strategies. His work is significant as it laid some of the foundational principles for revenue forecasting and yield management.

💡Airline Deregulation Act of 1978

The Airline Deregulation Act of 1978 is a piece of legislation that had a profound impact on the airline industry by introducing competition and deregulating airfares. The video explains that this act led to the birth of yield management practices as airlines had to compete on price and service for the first time, necessitating more sophisticated revenue management strategies.

💡Yield Management

Yield management is a specific application of revenue management principles within the airline industry. It involves maximizing revenue and profit by selling different seats at different prices or through different promotions. The video describes how American Airlines was a pioneer in implementing yield management, using technology to manage inventory control and overbooking to increase revenue.

💡American Airlines

American Airlines is highlighted in the video as a company that heavily invested in technological approaches to manage yield. They implemented a system-wide yield management strategy that aimed to maximize profit by increasing revenue through inventory control and data analytics. The video gives an example of their non-refundable advanced purchase rate as a tactic to increase sales and revenue.

💡Inventory Control

Inventory control is a key component of yield management, referring to the management of available seats or rooms as inventory. The video explains how American Airlines used inventory control to manage the availability of seats and optimize revenue. This involves analyzing data to anticipate demand and adjust the availability of seats accordingly.

💡Data Analytics

Data analytics plays a crucial role in revenue management by providing insights into customer behavior and market trends. The video mentions how American Airlines invested in technology to develop forecasting and data analytics capabilities to support yield management processes. These analytics help in forecasting demand and optimizing pricing strategies.

💡Overbooking

Overbooking is a strategy used in the airline industry to compensate for no-shows and maximize the number of seats sold. The video describes how American Airlines developed overbooking capabilities as part of their yield management system. This strategy involves selling more tickets than there are seats available, anticipating that some passengers will not show up.

💡Non-refundable Advanced Purchase Rate

The non-refundable advanced purchase rate is a pricing strategy mentioned in the video that was implemented by American Airlines. It involved offering lower prices for tickets purchased well in advance, with the condition that the ticket is non-refundable and the trip includes a Saturday night stayover. This strategy helped to fill empty seats and increase revenue.

💡Demand Forecasting

Demand forecasting is the process of predicting the quantity of a product or service that consumers will want to buy. In the video, it is discussed as a critical component of revenue management, where airlines like American Airlines used data to forecast demand and anticipate empty seats. This allows them to adjust pricing and inventory strategies to maximize revenue.

💡Rate Positioning

Rate positioning is the strategy of setting prices for products or services based on market conditions and customer segments. The video explains how American Airlines used rate positioning to create incremental revenue by testing the optimum pricing for different offers. This involves analyzing data to determine the best prices for different customer segments and adjusting offers accordingly.

Highlights

Revenue management history and its evolution over the years.

Invention of revenue management systems in the airline industry.

Problem it intended to solve: rationalizing pricing and maximizing revenue.

Ken Littlewood's formula for evaluating special rates versus regular rates.

1978 Airline Deregulation Act as the catalyst for yield management.

American Airlines' investment in technological approaches to managing yield.

Implementation of a company-wide yield management system at American Airlines.

Objective of yield management: maximizing profit through inventory control and data analytics.

Launch of a non-refundable advanced purchase rate by American Airlines.

Increase in sales and revenue due to yield management practices.

Use of yield management system to sell empty seats by repositioning discounts.

48 percent increase in American Airlines' profits due to yield management.

System to forecast demand and anticipate empty seats by analyzing data.

Dynamic optimization of rate positioning and offers for incremental revenue.

Restriction of offers to target specific segments to avoid revenue dilution.

Yield management's role in maximizing revenue per available seat.

Transcripts

in lesson one we are going to look at

revenue management history who invented

revenue management systems

what problem was it intending to solve

how and when was it first applied to

hospitality

what are the revenue management levers

and processes

this lesson will help you understand the

evolution of revenue management over the

years

now

the earliest history of revenue

management principles involved the

airline industry

in the early 1970s some airlines had

already started using basic mathematics

to rationalize their pricing

ken littlewood of british overseas

airways company now known as british

airways

came up with a formula to evaluate the

performance of special rates versus

regular rates on revenue forecasting

the 1978 airline deregulation act caused

an unprecedented

competitive environment in the airline

industry

before this act was enforced airfares

were controlled which led to less

competition and less complex pricing

structures

this act was therefore the driving force

behind the birth of yield management

practices

yield management in the airline industry

refers to the maximization of revenue

and specifically profit by selling

different seats at different prices or

different promotions

american airlines was the main airline

that invested in technological

approaches to managing yield

the airline implemented a company-wide

system

which came to be known as yield

management

the objective was to maximize profit by

increasing revenue through inventory

control and related data analytics

american invested heavily in technology

to primarily develop forecasting

inventory control and overbooking

capabilities in order to support yield

management processes

in 1985 american airlines launched a

non-refundable advanced purchase rate

valid for trips involving a saturday

night stay over and subject to

controlled capacity

the ultimate super saver

this led to an increase in sales and

revenue analysts across the industry

used the american yield management

system to sell empty seats by

repositioning and restructuring

discounts whenever needed

over the next years american airlines

profits were up 48 percent

in essence american airlines had created

a system to forecast demand and

anticipate empty seats by analyzing data

the system would then test the optimum

rate positioning of offers so it would

create incremental revenue the

optimization is dynamic as it was

re-evaluated as regularly as possible

these offers would be fenced in terms

restricted

so it would only target a specific

segment

passengers sharing a similar behavior in

this case

people traveling on a need period of

flights to avoid dilution of revenue

as a result

yield management maximized revenue per

available seat