The Financial Effects of Yield Management on the Airline Industry
25th, January 2013
Yield management, also referred to as revenue management, is a system that various companies employ in order to maximize their profit margins. This involves the company researching on the behavior of its consumers, and then works at ensuring that appropriate services are offered to consumers, in a way that is befitting to the consumer behavior. In order for a company to have an effective yield or revenue management, it must be able to predict its future financial status. This is through the use of the past financial status, as well as its present financial status. Therefore, the business transactions between consumers and the company are monitored in order to help in the company’s revenue management. The company in question also needs to base on other external information including information about prices of the company’s competitors in the market, the season in the market, as well as the consumers buying patterns. Basically, yield or revenue management involves decision-making, as the company attempts to figure out and make decisions regarding the kind of services to be sold, at what time to sell them, and at what price, which would ensure that the company rips maximum profits.
The decisions made in the process of revenue or yield management in a company are instrumental in making the company settle for prices for its services, which will be in alignment with the demand in the market, with regard to ensuring that consumer needs are met, while at the same time ensuring maximization of profits for the company. There are various aspects in the company and in the external environment, which help the company make viable decisions in the process of field management, especially with regard to the determination of prices for the services offered by the company. Such aspects include the type of services offered by the company. Depending on the nature and quality of the services a company offers, the management are in a position to make decisions, regarding the price they will fix for each type of service. In addition, the market type is also of essence in helping a company make decisions concerning service pricing. If the market is dominated by middle income-earners, it is more likely that a company will make service-pricing decisions based on the income or the economic status of the consumers in the market, as this calls for the consideration of the consumers’ affordability and purchasing power. However, in revenue management, a company aims at making the most profits, therefore, if the consumers have low purchasing power, the company might compromise on the quality of services it offers, so that this is in proportion to the amount of money consumers are willing to spend. These among other aspects are important in helping a company in decision-making, with regard to pricing in the process of revenue management.
There are specific companies that widely employ the process of yield management. These include hotel and hospitality companies, airline industry, and car hire, among others. The process of yield management is most effective when companies employ yield management systems that are computerized. Today, the internet presence has greatly contributed to making yield management successful. The airline industry effectively uses yield management, since most airlines can record and monitor interactions with their customers. These have special computerized systems or software, which help in the monitoring of seat reservations. When there are many vacant seats, the company might decide to lower the fare prices in order to entice more passengers into using the airline. This price reduction is advantageous to customers, but also advantageous to the airline. When an airline makes a decision to offer discounts to passengers at a period when travels are low, the airline company will benefit more. This is considering the fact that if discounts are not offered; passengers might opt for other airlines with discounts, thus making a specific airline lose out.
Generally, revenue management is most suitable if applied to companies, which sell goods and services, which are perishable. In the case of the airline industry, this financial managerial aspect is best fit in this industry. This is because the airline industry mainly uses tickets for passenger bookings. These tickets usually are expired after a specific period. The tickets are also not sellable, once a flight materializes. The airline industry has to forecast the demand of its services in future, and from there, they can set their preferred prices. Therefore, the airline industry highly employs price flexibility in its operations, as no price is fixed. Therefore, the consumers are able to exhibit their power of choice when using the airlines. For instance, some consumers might decide to travel during the off-peak period, because in this period, most airlines have always made the decision of price reduction, considering the low demand of consumers. However, during the high-peak season, most airlines reach a decision of raising the prices of their tickets. In doing this, the company has strategically arrived at that decision in order to compensate for the low returns during the off-peak period. Therefore, in trying to maximize profits, airline companies have to strategize, and make important decisions that will ensure high profits.
Since yield management is highly employed in the airline industry, there must be different ways in which it influences the operations in the different companies, as well as their profit margins. Overall, revenue or yield management in a company leads to a mix of services, which are differentiated in terms of pricing, depending on the period these are offered to consumers. Therefore, yield managers must have high analytical and decision-making skills, since the process of yield management is quite sophisticated and bases on various decisions made in the company. Nonetheless, for yield management to be considered effective in a company, this process must result in increased revenue for the company, as this is the main objective of the process. The management in charge of yield management are therefore, responsible for the outcomes of the process. If this process in a company leads to increased returns, the yield managers can be regarded as good decision-makers and skilled analysts. On the other hand, if this process fails the company, the involved yield managers will be considered not up to task, poor decision-makers, and lacking analytical skills to appropriately conduct yield management in the company.
For airline companies, yield management is a strategy, which gives the company their power in pricing. This is why some other companies resort to yield management in order to take control of their pricing. The aspect of flexible product pricing in yield management for airline industries, generally result in increased profits, if managers who are good decision-makers oversee the process.
According to Gupta (2011), airline companies should be more concerned with researching the choices of their customers, then incorporating these them in the price decision-making of their yield management process. Additionally, the professionals in revenue management working in airline companies ought to use their expertise in these companies beyond the basic management decisions involved with revenues. Instead, these should also develop ways through which the revenue management in airline can be extended to the customers. The revenue management professionals in the airline industry must also be the epitome of decision-making in their companies, as their area of specialization requires individuals with commendable decision-making. Nonetheless, most airlines hire qualified revenue management professionals, with proven decision-making skills. Today, these professionals working in the airline industry are able to integrate their customers’ behavior into the company revenue management process, after which important revenue management decisions are made.
The process of revenue management has been effective in the airline industry; however, there are considerable challenges that have been witnessed in this process. The major challenge for some airlines is the lack of sophisticated systems. For effective revenue management, airline companies need to have smart systems, which will make the process of decision-making in revenue management easier. This is with regard to the aspect of price optimization in the airline industry. Most systems in airline companies have been restricted to particular spheres and not all areas that affect the airline. If the systems could be extended to cover various areas in the airline industry, and integrate them in the current system, then the airline industry can experience operations that are more effective.
Some yield managers in the airline industry overlook the tenets of the process of revenue management. While this process includes price setting depending on the demand of the service and the season, some managers would go ahead and reduce their prices even in the high-peak periods, in order to attract more customers. This however, cannot work in their favor, since the company will experience losses. Price increase during the peak period in the airline industry in the process of revenue management is meant to compensate for the low profits made in the low-peak period. On the other hand, the discounted prices during the low peak period are meant to attract more customers. Therefore, yield managers are required to make their decisions on pricing, based on the facts of revenue management process, and not their own biased opinions of the process.
Despite the challenges faced by most airlines in the restrictive nature of their revenue management systems, these can still be upgraded if the companies look for more resources to invest in the diversification of their revenue management systems. It is important that revenue management in the airline industry involves other disciplines, and not be limited to specific areas only. This will ensure that the process is more successful. Currently, revenue management in the airline industry has been limited to the aspect of pricing. However, this process should be extended to involve other departments such as marketing, sales, and company operations in order to be effective. When this is done, the revenue management professionals in the airline industry will be able to make more informed decisions in the revenue management process, as the professional interaction with other professionals in different departments add to their knowledge about finance and decision-making. This will lead to better strategies and successful campaigns in the industry.
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