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.