The Evolution of Yield Management in the Airline Industry: Origins to the Last Frontier PDF
Preview The Evolution of Yield Management in the Airline Industry: Origins to the Last Frontier
Management for Professionals Ben Vinod The Evolution of Yield Management in the Airline Industry Origins to the Last Frontier Management for Professionals The Springer series Management for Professionals comprises high-level business and management books for executives. The authors are experienced business professionals and renowned professors who combine scientific background, best practice,andentrepreneurialvisiontoprovidepowerfulinsightsintohowtoachieve businessexcellence. Moreinformationaboutthisseriesathttp://www.springer.com/series/10101 Ben Vinod The Evolution of Yield Management in the Airline Industry Origins to the Last Frontier BenVinod CharterandGo Grapevine,TX,USA ISSN2192-8096 ISSN2192-810X (electronic) ManagementforProfessionals ISBN978-3-030-70423-0 ISBN978-3-030-70424-7 (eBook) https://doi.org/10.1007/978-3-030-70424-7 #TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNatureSwitzerland AG2021 Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether thewholeorpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseof illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similarordissimilarmethodologynowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. The publisher, the authors, and the editorsare safeto assume that the adviceand informationin this bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor theeditorsgiveawarranty,expressedorimplied,withrespecttothematerialcontainedhereinorforany errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional claimsinpublishedmapsandinstitutionalaffiliations. ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG. Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Innovation distinguishes between a leader and a follower Steve Jobs To my wife, Ann, who never complained over the years when I traveled around the globe visiting customers. Foreword Thisisabookabout“howto”createandoperateayieldmanagementsystem.Itwill likely be used by companies in a variety of businesses who seek to sell whatever service or product they offer at the highest price consistent with maximizing their totalrevenue. Inyearspast, Iknewagooddealabout thetechniques ofyieldmanagement.In recentyears,however,thepracticehasbeenverysignificantlyrefinedandimproved, and I can no longer claim either detailed knowledge or mastery of the techniques. Thereadershouldunderstand,however,thatitreallyworks. I think it is fair to say that American Airlines, while I was its chief executive (1985–1998),appliedyieldmanagementmorecreativelyandaggressivelythanother airlines, and that our use of the technique contributed very materially to our competitive success. In the beginning, our effort was a pen-and-pencil effort to overcome the obvious fact that we were selling seats for less than people were willingtopayforthem.Whilethereweremanyexamplesofthatproblem,theoneI foundmostoutrageouswasseeingsignsonLondon’ssidewalksadvertisingtripsto New York for very nominal amounts of money. In those days, travelers could buy thecheapseatsandturninticketsalreadypurchasedforarefund. That was not, of course, the only example. In the early 1980s, companies like Americancame under pressurefromnew entrantairlines thatpaid theiremployees lessandusedthesavingstoofferlowerprices.Inresponse,Americancameupwith theideaofsellingseatsatmatchingpricesbutrequiringtravelerstostayawayfrom home for a specified amount of time, thus preventing business travelers, who paid the highest prices and had demanding schedules, from using the lower fares. Business travelers were unwilling to either use the services of the new entrants, which were generally of lower quality, or tolerate the minimum stay requirements associatedwithourmatchingfares. We were also frustrated by our inability to appropriately match supply and demand. We often found, for example, that we were dispatching partially filled aircraftonlong-haulinternationalroutesdespitethefactthatcustomersincitieson our network wishing to fly to those international destinations were unable to reach thehubcityfromwhichtheinternationalflightwasdeparting. Aswegotintoourstudy,itbecameobviousthattheproblemwasfartoocomplex tobesolvedwithoutfindingwaystoassessthemanywaysinwhichagivenseatona vviiii viii Foreword particularaircraftmightbecombinedwithindividualseatsonotheraircrafttocreate variousproducts.Aswebegantounderstandthepossibilities,webuiltmathematical models to identify options and the computational capabilities to massage and evaluatethecombinations. Astheyearspassed,wehiredalotofverysmartpeopletobuildthemodelsand program the computers. Tom Cook was the officer who led the effort, and Ben Vinod, the author of this book, was one of the many people who helped build our industry-leadingcapability. My colleagues and I at American were proud of what Tom and his team accomplished, and I am confident that those interested in this subject will find Ben’sbookrewarding. PresidentandChiefExecutiveOfficer, RobertL.Crandall AmericanAirlines(1985–1998) Gloucester,MA,USA October6,2020 Foreword I joined the American Airlines Operations Research (OR) group as a Director in 1982.BenVinodjoinedtheteam4yearslaterasanORanalyst.TheORGroupwas relatively small at the time with several dozen people. At that time, the group was concentratingondevelopinginnovativeOR-basedsolutionsforafewlimitedfunc- tional areas of the airline; most important among them was revenue management (RM). The RM team was developing American’s RM system called DINAMO. American Airlines won the 1991 Edelman Award from INFORMS for the best application of OR (revenue management) in the world. From 1982 to 1987, the AAORgroup grewrapidly increasing itsimpactintomany functional areas ofthe airlineincludingmarketing,capacityplanning/scheduling,crewplanningandsched- uling,airportoperations,maintenanceandengineering,systemsoperationscontrol, andothers.Inaddition,thegroupexecutedseveralstrategicstudiessuchaswhether to build an additional 1-billion-dollar terminal in DFW to enable the growth of American’s largest hub. These studies and the OR-based decision support systems thatwereleading-edgesolutionsintheairlineindustrywereoftensponsoredbythe CEORobertL.Crandallwhomanythoughtwastheindustry’sbestCEO. In 1987, American Airlines Decision Technologies, AADT, was formed as a wholly owned subsidiary of AMR Corp. (parent company of American Airlines) with the charter to provide OR-based solutions to organizations external to AA. Robert Crandall’s only restriction for AADT was to make a profit in the first year and not to engage with direct airline competitors. AA remained AADT’s primary client but grew very rapidly. AADT’s first external client was Amtrak, andtheprojectwastobuildaRMsystem.AADT’sgrowthwasexplosivewithmany external clients worldwide and many of the larger engagements were to install or buildaRMsystem.Airlines (notdirectAAcompetitors),hotels, ClubMed,Royal Caribbean Cruise Lines, Ryder Truck, the French National Railroad (SNCF), and eventheU.S.NavyweremajorRMclients.BenVinodwascriticaltothegrowthof AADT and the evolution of the science of RM in the airline industry and other important types of business during his tenure at AA, AADT, and SABRE and is uniquelyqualifiedtowritethisbook. Intheearly1990s,AADTandSABREweremergedandsubsequentlyspunoff from AMR. After I left SABRE in 1999, Ben Vinod continued to lead at SABRE providing both management and intellectual leadership applying RM and more iixx
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