Airline Yield Management

A IRLINE Y IELD May
M ANAGEMENT 2009
VKRB
Frau Prof. Schusteritsch
Julius Neubauer, 5BT

Kärntner Tourismusschulen Warmbad Villach
Airline Yield Management 2009
I. PREFACE
As the global financial crisis continues to expand, it becomes increasingly important for
companies of each economic sector to ensure and optimize its revenues. Airlines
already recognized this in the late 70s, when the airline deregulation act was signed
into law by the President of the United States of America. The purpose of this act was
to remove governmental control over fares, routes and the market entry of new
airlines. This led to an oversaturation of capacities in this market because within a few
years many new private airlines emerged. In this time they were constantly keen on
improving their cost structures to remain competitive. This was yield management’s
hour of birth.
Yield Management enabled airlines to dynamically adjust fares according to demand
and to appeal to different target groups by offering customized rates. The basic
consideration of Yield Management is to sell goods or services for the highest price a
customer is willing to pay. To achieve this it utilizes several techniques, all explained in
detail in the course of this skilled work.
I decided to choose Yield Management because I think it’s one of the most important
processes for airlines. Being in proper use, it enables companies to stimulate demand,
adjust fares and make crucial decisions on seat allocation. During my research I read
several books and dissertations which gave me a many-sided insight on this matter. It
was very interesting to compare the different points of view of each author and hence
draw my own conclusions.
But I also encountered a few problems. In search of information for a case study on
how airlines actually imply yield management, I figured out that this information is
considered confidential. So, all airlines that I was in correspondence with rejected my
requests. To prove this, I decided to attach two emails in the appendix.
II. DECLARATION OF INDEPENDENCE
With these words I am declaring that I have written this skilled work on my own, that I
have just used the stated records and that I have submitted this skilled work nowhere
else for examination purposes.
Villach, May 2009

Julius Neubauer
Julius Neubauer 2
III. TABLE OF CONTENTS

I. PREFACE ....................................................................................................................................... 2
II. DECLARATION OF INDEPENDENCE ................................................................................................ 2
III. TABLE OF CONTENTS .................................................................................................................... 3
IV. TABLE OF FIGURES ........................................................................................................................ 4
V. PASSENGER AVIATION IN GENERAL .............................................................................................. 5
1. EUROPEAN BEGINNINGS ....................................................................................................................... 5

2. AMERICAN BEGINNINGS ....................................................................................................................... 5
3. AIRLINES TODAY ................................................................................................................................. 6
4. STRATEGIC ALLIANCES .......................................................................................................................... 8
A. Development ............................................................................................................................. 8
B. Alliances today .......................................................................................................................... 8
I. Star Alliance ......................................................................................................................................... 8
II. oneworld ............................................................................................................................................. 9
III. SkyTeam .............................................................................................................................................. 9
C. Aims and benefits of strategic alliances ................................................................................. 10
5. CODE SHARING................................................................................................................................. 10
A. Advantages ............................................................................................................................. 10
B. Disadvantages ........................................................................................................................ 11
VI. YIELD MANAGEMENT 101 .......................................................................................................... 11
1. DEFINITION ..................................................................................................................................... 11
2. DEVELOPMENT................................................................................................................................. 12
3. REQUIREMENTS FOR THE IMPLEMENTATION OF YM................................................................................. 13
VII. INSTRUMENTS USED BY YIELD MANAGEMENT ...................................................................... 14
1. MARKET SEGMENTATION ................................................................................................................... 14

2. PRICE DIFFERENTIATION..................................................................................................................... 16
3. CAPACITY MANAGEMENT................................................................................................................... 19
A. Price/Quantity Management .................................................................................................. 20
I. Demand Management ....................................................................................................................... 20
II. Data Acquisition and Forecasting ...................................................................................................... 21
III. Allocation........................................................................................................................................... 22
1. Limiting curves ............................................................................................................................. 23
2. Constant allocation ...................................................................................................................... 24
3. Nesting ......................................................................................................................................... 25
4. Network Yield Management ........................................................................................................ 26
B. Overbooking Control ............................................................................................................... 28
VIII. SOFTWARE - NAVITAIRE “SKY PRICE” ..................................................................................... 31
1. COMPANY OVERVIEW ....................................................................................................................... 31

2. “SKYPRICE” ..................................................................................................................................... 32
IX. CONCLUSION .............................................................................................................................. 33
X. APPENDIX ................................................................................................................................... 34
XI. BIBLIOGRAPHY ........................................................................................................................... 39
Julius Neubauer 3
IV. TABLE OF FIGURES
Figure 1: US Airline route structure before the Second World War. ........................................... 5
Figure 2: US-Airline development from 1914 to 1928 ................................................................. 5
Figure 3: Development of airlines compared to strategic alliances.............................................. 8
Figure 4: Member airlines ranked by passenger numbers ........................................................... 9
Figure 5: Aims and benefits of strategic alliances ....................................................................... 10
Figure 6:Boarding Pass of a code shared flight: .......................................................................... 11
Figure 7: Basic idea of yield management .................................................................................. 11
Figure 8: Correlation between marketing and YM ..................................................................... 12
Figure 9:US-Airline route structure after deregulation in 1978.................................................. 13
Figure 10: Typical timeline of reservations of private and business travelers ........................... 16
Figure 11: Developement of passenger volume in Germany, sorted by occasion ..................... 16
Figure 12: Impact of price ranges on the contribution margin ................................................... 17
Figure 13: From price differentiation to YM ............................................................................... 18
Figure 14: Course of booking without demand management .................................................... 20
Figure 15: Impact of DM on the revenue .................................................................................... 21
Figure 16: Splitting of physical- into virtual compartments ....................................................... 22
Figure 17: Predicted course of booking calculated by a forecast model .................................... 23
Figure 18: Calculated puffer zones ............................................................................................. 23
Figure 19: Fully implemented limiting curve .............................................................................. 23
Figure 20: Static allocation of virtual compartments (VC) .......................................................... 24
Figure 21: Basics of nesting ......................................................................................................... 25
Figure 22: Hub and spoke system ............................................................................................... 26
Figure 23: Value of different legs and itineraries........................................................................ 27
Figure 24: Virtual Nesting for MUC – DUB (via STN) .................................................................. 27
Figure 25: Load factor on a non-overbooked flight .................................................................... 28
Figure 26: Load factor on a overbooked flight without restrictions ........................................... 28
Figure 27: Load factor on a flight with optimized overbooking rate. ......................................... 29
Figure 28: Calculation of optimal overbooking rate .................................................................. 29
Figure 29: Graduated overbooking rate ..................................................................................... 30
Julius Neubauer 4
V. PASSENGER AVIATION IN GENERAL
1. EUROPEAN BEGINNINGS
On November 20th, 1909, Ferdinand Graf von Zeppelin founded the world’s first airline,
based in Frankfurt am Main. The “DELAG” (German Airship Corporation) carried more
than 34.000 passengers between 1910 and 1913.
The “DELAG“ was followed by further companies. In 1913 a large-area transportation
network existed between Düsseldorf, Baden-Oos, Berlin-Johannistal, Gotha, Frankfurt
am Main, Hamburg, Dresden and Leipzig.
The foundation of the “Deutsche Luft Hansa AG” in January 1926 is considered a big
step forwards in the European passenger aviation. It resulted from the merge of the
two leading German airlines: “Deutscher Aero Lloyd AG” and “Junkers-Luftverkehrs
AG”.
This emerging state-run airline was very fast-paced. So the “Luft Hansa” was able to
take up business to Far-East and South American destinations already one year after its
foundation. 1
founded in
KLM 1919
Further important airlines at this time:
Air France 1933
Aero O/Y (nowadays Finnair) 1924
Aircraft Transport and Travel 1919
Imperial Airways 1923
2. AMERICAN BEGINNINGS
The American civilian route structure was
developed merely sporadic in the nineteen-
twenties (see fig. 2). It was rather designed for
the transportation of airmail. This changed as
soon as the “Ford Trimotor” (A propeller-driven
aircraft with capacity for twelve passengers)
was introduced in 1925. This is considered the FIGURE 1: US AIRLINE ROUTE STRUCTURE BEFORE
THE SECOND WORLD WAR.
starting shot for the boom of passenger aviation
in America.
Number of US-Airlines
An even more exhilarant event was the first solo- 30
transatlantic flight by Charles Lindbergh on
20
May 19th, 1927. Since then the number of US-
airlines has nearly doubled (see fig. 1). 2 10
FIGURE 2: US-AIRLINE DEVELOPMENT FROM 0

1914 TO 1928
1914 1918 1922 1926 1928
1
cf. Fluggesellschaft, http://de.wikipedia.org/wiki/Fluggesellschaft, As at 27.1.2009
2
cf. Airline, http://en.wikipedia.org/wiki/Scheduled_air_transport, As at 26.1.2009
Julius Neubauer 5
The most important airlines at this time were:

founded in
Delta Air Lines 1924
United Air Lines 1926
Eastern Air Lines 1926
Northwestern Air Lines 1926
3. AIRLINES TODAY American Airlines 1930
An airline generally provides air transporation services for passengers or freight,

generally with a recognized operating certificate or license.
Nowadays, airlines can be divided into network-, charter- and low-cost carriers:
Network Carriers:
A network carrier is a carrier that provides scheduled flight services within a hub &
spoke (see figure 22) system. 3 They are often state-run (Flag carriers) but most
commonly in private ownership, or with a governmental share.
 State-run airlines: (Flag carriers)
This means state-run and financed airlines. They are also called flag
carriers because they are considered to be an object of prestige,
carrying the ensign on each aircraft.
The term “Flag carrier” is a legacy from the time when countries
founded state-run airlines. Aviation rights were often negotiated
between governments, denying private airlines an open market. So,
many nations were forced to launch airlines to remain competitive.
Some countries also launched them for nationalist reasons and to
stimulate its economy.4
But a flag carrier does not have to be state-run, as long as it is
designated by a country’s government.
Due to the availability of public funds, flag carriers aren’t so much
exposed to market fluctuation as a private carrier would be.
Examples are: EgyptAir, Emirates Airlines (fully state-owned)
Air France, Alitalia (partial governmentally share)
Lufthansa, Quantas (private ownership)
Charter airlines:
This means airlines, that normally do not offer own flights, but flight services to
individuals, tour operators and other tourism businesses.
It differs itself from network carriers as it does not sell tickets directly to the customer.
In most cases a charter company sells certain contingents to travel agencies,
companies or even sports teams.
3
cf. Airline, http://en.wikipedia.org/wiki/Scheduled_air_transport, As at 14.3.2009
4
cf. Flag carrier, http://en.wikipedia.org/wiki/Flag_carrier, As at 15.3.2009
Julius Neubauer 6
They also distinguish themselves from “regular” airlines through the airports they
serve. Whilst large network carriers use established hub & spoke networks, charter
airlines offer only point-to-point flights, serving smaller, remote airports in order to
minimize costs and offer faster connections.5
Furthermore, charter airlines are expected to offer lower fares than network carriers.
To reach this, intergovernmental, conditional agreements were made to relieve them
of taxes and dues.
Two of these conditions were:
 A charter flight may only be offered in conjunction with a touristic service
 Tourists arriving by charter may only depart by a charter flight.
Hence, the lower fares result from:
 very high load factors (90% and above)
 guaranteed sale of the total or partial capacities through travel agencies or
others
 lower landing fees at remote airport
 ticketing and administration savings (ticketing is usually done by travel
agencies)
The most established charter airline is the German Condor Airline. It is a subsidiary
company of Lufthansa.
Low-cost carriers:
A low cost carrier is an airline that offers very low fares by focusing on the core service
of a flight, the transportation without any frills. The low fares are achieved by
restrictions on flexibility, service and in-flight-comfort. Free rebooking to other flights
is either impossible or connected with extensive costs for the customer, on-board
meals are available, but pricy and departure- and arrival airports are often away from
international airports. They mostly offer short- and medium-haul-flights at notably
lower fares. Their profit results particularly from a higher load factor.
But these are only the measures that can be noticed by the customer. However there
are several measures set in the background:
 uniform fleet (lower maintenance costs)
 short turnaround times
 single-class cabin
 minimum crew (as permitted by law)
Established European low-cost carriers are: Ryanair, Easyjet, SkyEurope and Air Berlin.6
5
cf. Air charter, http://en.wikipedia.org/wiki/Air_charter, As at 15.3.2009
6
cf. Fluggesellschaft, http://de.wikipedia.org/wiki/Fluggesellschaft, As at 24.1.2009
Julius Neubauer 7
Attached in the appendix you can find up-to-date statistic and transportation numbers.
4. STRATEGIC ALLIANCES
A strategic alliance is seen to be a cooperation amongst aviation companies.
At the same time each single company remains legally independent, but coordinates
certain elements like booking systems, frequent flyer programs, interconnecting flights
and “lease” contingents of seats among themselves (code sharing).7
A. DEVELOPMENT
The first international strategic alliance was founded in 1986, as Air Florida and British
Airways agreed to operate the route London – Amsterdam code shared. By the end of
the nineties the formation of alliances was favored by the economic crisis in south- and
East Asian tiger states and constantly increasing kerosene prices.
Figure 3 illustrates the historic development of airlines versus strategic alliances:8
Year 1994 1995 1996 1997 1998 1999 2000 2001

Airlines 136 153 159 177 196 204 220 200
Alliances 280 324 389 363 502 513 579 501
FIGURE 3: DEVELOPMENT OF AIRLINES COMPARED TO STRATEGIC ALLIANCES
B. ALLIANCES TODAY
At present three global alliances exist:
 Star Alliance
 OneWorld
 SkyTeam
I. S TAR A LLIANCE
Star Alliance was founded in 1997 as the worldwide first strategic merge of Air Canada,
Lufthansa, SAS, Thai Airways International and United Airlines. The code shared (see
page 10) operation of several routes began in the very same year.
Today it counts more than twenty members and carries nearly 500 million passengers
per year. Its fleet counts 3325 aircrafts, which serve 912 airports in 159 countries.9
7
cf. Allianz (Luftfahrt), de.wikipedia.org/wiki/Allianz_(Luftfahrt), As at 20.1.2009
8
cf. Sterzenbach, Conrady, Luftverkehr, Betriebswirtschaftliches Lehr- und Handbuch. München/Wien: Oldenburg Verlag 2003,
Page 205
9
cf. Facts&Figures, http://www.staralliance.com/de/press/facts_figures/index.html, As at 16.1.2009
Julius Neubauer 8
II. ONEWORLD
In September 1998 American Airlines, British Airways, Canadian Airlines, Cathay Pacific
and Quantas formed oneworld with the intention of generating more value for
customers, shareholders and employees than any airline can achieve by itself.
In 2008 oneworld has carried 320 million passengers using 2200 aircrafts, operated 3,5
million flights around the globe and generated a revenue of 100 billion US$.10
III. S KY T EAM
Delta Air Lines and Air France agreed to a partnership in 1999. Subsequent to the
joining of Aeromexican and Korean Air, the SkyTeam was formed.
The Alliance serves 905 destinations in 169 countries. Furthermore it has 2500 aircrafts
at its disposal, annually carrying 462 million passengers. A remarkable fact is that one
third of them are members in frequent flyer programs. 11
Figure 4 illustrates the main member airlines ranked by passengers transported each
year:
Star Alliance
OneWorld
SkyTeam
•United Airlines •American Airlines •Delta Air Lines

•US Airways •British Airways •KLM
•Lufthansa •Iberia •Air France
•All Nippon Airways •Quantas •Continental Airlines
•Air China •Cathay Pacific •China Southern Air
•Air Canada •Aer Lingus •Korean Air
•SAS •Finnair •Alitalia
•Singapore Airlines •Lan Chile •Aeromexico
•Turkish Airlines •Royal Jordanian •Czech Airlines
FIGURE 4: MEMBER AIRLINES RANKED BY PASSENGER NUMBERS
10
cf. Introduction to oneworld, www.oneworld.com/factsheet/W1_2009-01-08 introduction to oneworld.pdf, As at 27.1.2009
11
cf. skyteamFactSheet, www.skyteam.com/downloads/news/facts/skyteamFactSheet.pdf, As at 27.1.2009
Julius Neubauer 9
C. AIMS AND BENEFITS OF STRATEGIC ALLIANCES 12
Market-directed Business-directed Customer

aims aims benefits
Market Flight-plan
development Coordinated supply enhancement
(through (planes, fuel) (more destinations,
codesharing) better coordinated)
Technical Frequent flyer

Increase of programs
cooperation
notoriety and image valid intraalliancial
(DP, Maintainance)
Lower fares
Joint marketing (according to studies,
fares of alliance members
are about 29% lower)
FIGURE 5: AIMS AND BENEFITS OF STRATEGIC ALLIANCES
5. CODE SHARING
Code sharing is an often used means for load factor increase and the “expansion” of
route structures in strategic alliances
The term „code sharing“ is used if two or more airlines share capacities on a scheduled
flight. Each airline involved lists this flight on their own flight schedule with their own
flight number but it is conducted by only one of the partners, the so-called operating
carrier.
This allows airlines to offer flights that aren’t even conducted by themselves but by
alliance members (expansion of route structures). 13
A. ADVANTAGES
 Linkage of route structures: Joint marketing of certain routes only makes them
profitable.
 Decrease of competition between code sharing-partners.
 Small airlines take advantage of bigger carrier reputations and big airlines vice
versa benefit from favorable cost structures.
12
cf. Sterzenbach, Conrady, 2003, Page 207
13
cf. Codesharing, http://de.wikipedia.org/wiki/Codesharing, As at 2.2.2009
Julius Neubauer 10
B. DISADVANTAGES
 Massively increased coordination effort: Changes on the flight plan of
competitors can affect the load factor of own flights.
 Quality standards of operating carriers don’t always match those of code
sharing partners. This can cause a negative overall impression for the
passenger.14
FIGURE 6:BOARDING PASS OF A CODE SHARED FLIGHT:

OPERATING CARRIER: HLX
CODESHARING-PARTNER: DLH
VI. YIELD MANAGEMENT 101
1. DEFINITION
Yield Management is the process of integrated price-
and capacity management with the objective of
splitting a total capacity given into partial capacities
and to assign them to different price ranges in order
to achieve a revenue optimization and profit maximization within the entire route
structure of an airline. 15 Airlines can usually achieve a 3-5% growth in revenues.
Lufthansa estimates its additional revenues caused by the implementation of Yield
Management System at 0,9 billion $ in 1997.16
The basic consideration is demonstrated by the following example:
An airline offers a flight from destination A to destination B. On this route two fares
are available: The full fare rate for 125€ or the discount fare for 75€, which has to be
booked early in advance:
Sell at Discount Fare:

Discount 75€
Flight from
Full-Fare:
A to B Sell at "Full-Fare"
125€
Do not sell at
Discount
Do not sell 0€
FIGURE 7: BASIC IDEA OF YIELD MANAGEMENT
14
15
cf. Weiß Matthias,Häußler Steffen: Yield Management – Konzepte und Techniken. Studienarbeit, University of Hohenheim,
2005, Page 1
16
cf. Christoph Weber: Revenue Management am Beispiel von Airline Revenue Management, Hauptseminararbeit, University of
Köln, 2007, Page 11
Julius Neubauer 11
Now the question poses itself, whether the airline should accept the booking request
for one discount-fare ticket at an early point, or if it should wait until a full fare-request
emerges. But the second option involves the risk of not selling the seat at all.
Yield Management contains several instruments and techniques. It assumes that a
service is sold to different customers at different times at different prices. 17
Furthermore a powerful IT infrastructure has to be given to analyze historic data from
databases and calculate forecast models out of them.
Often also the term revenue- or profit management is used. This derives from the fact,
that “yield” (in airline business) defines the revenue per passenger kilometer.
Through its integrated pricing component it is linked closely to marketing.
The figure below illustrates this correlation:
Marketing Yield Management
Product Price Capacity

Management
Communication
Overbookings
Price/Quantity
-Management
Distribution
FIGURE 8: CORRELATION BETWEEN MARKETING AND YM
2. DEVELOPMENT
The very beginnings of Yield Management can be found in the early sixties. At that
time the first controlled overbookings were allowed. This means that more seats were
sold than actually available. 18
As the American air transportation industry was deregulated in 1978, and airlines were
abruptly allowed to coordinate their destinations and fares themselves, a rapid
development of Yield Management succeeded due to fast emerging business
competition.
17
cf. Fricke Marco: Yield Management am Beispiel einer Fluglinie. Studienarbeit, University of Hamburg, 2005, Page 2
18
Julius Neubauer 12
After the Airline Deregulation Act was signed into law by Jimmy Carter, 128 new
airlines appeared. This led to extensive overcapacities on the major routes and hence
to serious decline in prices (The flight price index dropped from $100 in 1977 to $87 in
198619). Through the favorable cost structures of smaller low cost carriers, the big
major airlines got into pressure to act because the market share of private carriers
rose and they could not keep up with the aggressive price-dumping. 20
So, the major airlines were forced to diverge from their present rate models and use
more flexible sales strategies. Therefore, Yield Management Systems were invented
and implemented to protect the high-yield segment and at the same time compete
against the low-yield segments of low cost carriers. 21
First to mention in this case is American Airlines. American Airlines already introduced
a capacity-controlled discount fare in 1975, called “Super-Saver”.
At this special fare, a specific contingent of seats is reserved for later booking business
travelers, but at higher rates. 22
The success of this uprising concept was remarkable. The increase in sales of American
Airlines was numbered at 221% from 1978 to 1988 and new competitors were
squeezed out of market within one year.
FIGURE 9:US-AIRLINE ROUTE STRUCTURE

AFTER DEREGULATION IN 1978
3. REQUIREMENTS FOR THE IMPLEMENTATION OF YM

For the successful implementation of Yield Management Systems, certain
requirements should be fulfilled: 23
 Perishability of services:
A service expires if it isn’t used and can consequently not be sold any further
(ie: seats on a flight, hotel rooms). The service “perishes”.
 Possibility of market segmentation:
In travel- and in touristic businesses as well as in airlines the target markets can
be well segmented into 2 main segments: business and private. Through
different rates, the willingness to pay of each individual segment can be well
exploited.
19
cf. Axt Martin: Yield Management bei Fluggesellschaften. Hausarbeit, University of Eichstätt-Ingolstadt, 2004, Page 2
20
cf. Weiß, Häußler, 2005, Page 1
21
22
23
cf. Axt, 2004, Page 3
Julius Neubauer 13
 Sale of a product prior to its use:

This is essential for the application of Yield Management Systems, because
otherwise Price/Quantity Management would be impossible.
 Fluctuating demand:
The demand fluctuates in course of time. Without this factor, Yield
Management Systems would be unnecessary, because at a static demand, cost
structures and available capacities could be adjusted.
 Strictly limited possibilities of capacity adjustment:
Available capacities cannot be increased or reduced without major
difficulties.24
Considering these requirements, it’s obvious that passenger aviation is almost
predestined for the implementation of Yield Management Systems. In the meantime
Yield Management is already being successfully implemented by car rentals, in the
hotel industry and at big events (i.e. concerts).
VII. INSTRUMENTS USED BY YIELD MANAGEMENT

The form of Yield Management that Airlines use is an extremely complex one. It utilizes
several instruments and techniques, which I would like to explain on the following
pages:
Market segmentation
Price differentiation
Capacity Management
1. MARKET SEGMENTATION
To split a market up into single segments, you first have to determine its complete
potential. This means the- under certain conditions- achievable- total revenue on this
market. Related to airlines this means to determine the total demand of transportation
within the entire route structure. Subsequent, the total demand can be assigned to the
individual segments.
24
Julius Neubauer 14
The segmentation of a total market often becomes necessary because it consists of

demanders that differentiate themselves by the experienced benefit of a service and
their price elasticity. The carrier can leverage these differences by offering different
rate models that are individually shaped to each market segment’s requirements.
The objective of market segmentation is to split the collectivity of demanders into

individual segments on the basis of different criteria. These segments should in
themselves be as homogeneous (having the same claims) as possible but to one
another as heterogeneous (different) as possible. The results of this procedure then
provide a basis for price differentiation. 25
In passenger aviation two major segments can be can be clearly distinguished from
each other: Private and business travelers. These two major segments show several
varieties regarding their behaviors and claims.26
Private travelers:
Private travelers basically differ from business travelers in their behavior of

booking. They generally book their tickets far in advance and have high price
sensitivity. Private travelers mostly choose the lower-priced fare, which is often
linked to unfavorable restrictions as for example no free of charge rebooking
and cancellations. But these restrictions are not relevant for private travelers
because they assume that they will definitely be able to catch the booked
flight.
Business travelers:
Business travelers on the other hand book their tickets on short notice.
Therefore their price sensitivity is considerably lower than that of private
travelers. They appreciate the superior flexibility and comfort that higher
priced tickets offer. Thus most business-fares include amenities such as free of
charge rebooking and cancellations until take-off. These amenities are essential
for the business traveler because day-to-day business involves rescheduling
appointments and cancellations which often preclude from showing up in the
end. Another reason why people book business fares is that thereby the access
to airport lounges is granted. In these areas that are marked out from regular
waiting halls, all facilities necessary to proceed regular work during the waiting
period are given. These lounges nearly always dispose of wireless internet
access, laptop power supplies and sometimes restaurants, bars, shower rooms
and sleeping accommodations.
25
cf. Fricke, 2005, Page 14
26
Julius Neubauer 15
FIGURE 10: TYPICAL TIMELINE OF RESERVATIONS OF PRIVATE AND BUSINESS TRAVELERS
Number of
reservations
Private traveler
Business traveler
Days before
0 364 departure
FIGURE 11: DEVELOPEMENT OF PASSENGER VOLUME IN GERMANY, SORTED BY OCCASION
250
Private
200
Business
150
100
50
0
1976 1983 1990 1997 2004 2011 2018
2. PRICE DIFFERENTIATION
Price differentiation is on hand if a provider offers identical or marginal different
services to different segments of a market at different prices. 27
Related to an airline, this definition can be explained as follows:
The market segmentation has shown that different customers are up to pay different
prices for nearly equal services (A flight from A to B, in this case). As already
mentioned there are two major segments on the aviation market: the very price
sensitive private travelers, who book their tickets far in advance and the business
traveler, who books on short notice and is not as price sensitive. Based on these
findings new rate models can be established that satisfy the claims of each segment
and benefit the contribution margin and load factor of all capacities available:
27
Julius Neubauer 16
 A low-priced rate that is though endued with serious restrictions (called

fences). Classic fences of economy-fares are for example lower baggage limit,
limited service on board, the “Saturday night rule” and rebooking at extra
charge.
 And a higher priced one with amenities like free rebooking and cancellations
and free access to airport lounges.
The thereby offered services can differ in space and on board service offered, but the
essential benefit (the flight A – B) remains the same for all passengers. 28
90 80 83,3
% of possible contribution margin
75
80
67
70
60 50
50
40
30
20
10
0
1 2 3 4 5
Price Ranges
FIGURE 12: IMPACT OF PRICE RANGES ON THE CONTRIBUTION MARGIN
This figure shows that the introduction of additional booking classes can lead to an
increased possible contribution margin and with it a higher profit. But on the other
hand also the complexity of a Yield Management System rises with each additional
booking class introduced. This involves higher costs for customer information,
marketing and administration.
The objective of price differentiation is to fully exploit the willingness to pay of each
single customer by offering different booking classes. The correct economical term for
this procedure is skimming of customer surplus. This means the difference between
the price charged and the maximum price that the customer would be willing to pay
for a certain good or service.29
28
29
Julius Neubauer 17
Yield Management differentiates prices as follows: 30
 By compartment: First/Business/Economy
 By time of booking: Early bird discount, last minute offers
 By season: Strong or poor demand
 By region: by airports of departure/arrival (special airport
surcharges) (also called Origin and Destination, O&D)
 By destination: National/Continental/Intercontinental
 By quantity: by amount of participating persons (volume discount)
 By sales channel: online-only fares, direct booking cheaper than booking
via agency
In airline business, price differentiation is always linked to a quantity component.
As apparent from figure 13, a seasonal price differentiation charges different prices
at different times (higher prices on strong demand and lower prices on poor demand).
Now one might expect that only low fares are offered on poor demand and vice
versa. But this shapes up as wrong, because merely the size of contingents
(the amount of seats available) is adjusted (according to demand). This means:
The majority of seats is sold at low prices on poor demand but a small contingent
is reserved to customers willing to pay a higher price. This gets done to still be
able to satisfy the higher-value demand of business travelers (see figure 14 on
page 20).
Price
Seasonal price fluctuation
Price
Time
Price
Weekly price fluctuation P1 P2 P3
Mo Di Mi Do Fr Sa So
Time Contingent P3
Price
Contingent P2
Daily price fluctuation Contingent P1
02:00 – 19:00 19:00-02:00
Time
FIGURE 13: FROM PRICE DIFFERENTIATION TO YM
30
Julius Neubauer 18
3. CAPACITY MANAGEMENT
At a constant rate of demand it would be sufficient to apply a differentiated pricing
system to assure an optimal revenue and profit. Unfortunately, customers demand
underlies permanent fluctuation. This can be caused by seasonal courses, sport events,
conventions, political and economical occasions.
Based on the assumption that customers with a lower willingness to pay book their
flights earlier than such with a higher one, it’s the objective of capacity management
to reserve enough capacities for late booking (and less price sensitive) segments of a
market.
The calculation of the optimal contingent size thus involves trading off the risk
of unassigned higher-priced seats against the “safe” revenue on low-priced seats that
are booked early in advance. 31
A further problem is that possible cancellations and rebooking just before take-off can
cause unused capacities. These are often enlarged through so called „no-shows“ (this
means passengers that have already booked a flight, but fail to show up in the end)
even more. A behavior like this can be observed in day-to-day business because it
sometimes doesn’t allow a passenger to show up in the end. Especially noteworthy is
that no-shows remain without any financial consequences, if the customer has booked
a full-fare-ticket. Otherwise the customer often has no claims of restitution and the
ticket simply expires.
Due to all above mentioned risk factors, airlines generally accept more bookings than
capacity allows. One talks about overbooking. But such an approach can lead to
passengers being refused boarding on the day of departure (generating additional
costs) because the cancellations and no-shows hoped for, did not occur and hence did
not compensate for the overbooked capacities. In addition to regular passengers, so
called „go-shows“ (unscheduled passengers that have bought their tickets either last
minute or on the day of departure) may emerge and further complicate this process. 32
Capacity Management mainly utilizes 2 elements:
 Overbooking Control:
to calculate the optimal number of bookings to be accepted;
 Price/Quantity Management:
to assign accepted bookings to available capacities and the right booking
classes;
On the following pages I would like to enlarge on these two main elements.
31
32
Julius Neubauer 19
A. PRICE/QUANTITY MANAGEMENT
The main objective of Price/Quantity Management (as already mentioned) is to assign
accepted bookings to unallocated capacities and at the same time to the right
bookings classes. Along these lines it deals with the creation of contingents to be able
to distinguish the lower-value demand of tourists and private travelers from higher-
value demand of business travelers.
In order to subsequently deal with these subjects, the basics of demand management
and data acquisition and forecasting must first be explained.
I. D EMAND M ANAGEMENT
The purpose of demand management is to assign a priority to each single booking

request and to decide on this base whether a request is accepted or rejected. This is a
crucial task, because without it all incoming requests would be satisfied uncontrolled.
This may lead to the following consequences: 33
 The incoming lower-value demand would occupy valuable seats at an early

stage of the booking process,
 And therewith not spare capacities for the later emerging, higher-value
demand of business travelers.
The lower-value demand would consequently crowd out higher-value demand bit by
bit, resulting in suboptimal revenues:
140
120
450 €
100 200 €
Demand: 120
Max.Cap.: 100 60 €
80
Demand
60
40
20
0
52 48 40 32 24 20 16 12 10 9 8 6 5 4 3 2 1 0
Weeks before departure
FIGURE 14: COURSE OF BOOKING WITHOUT DEMAND MANAGEMENT
33
Julius Neubauer 20
That implies:
120
100
Capacity (max. = 100)
80
22500€
13000€
450 €
60
200 €
+100%
60 €
40
7000€
20
2100€
900€
0
without DM with DM
FIGURE 15: IMPACT OF DM ON THE REVENUE
Hence it is economically reasonable to reject lower-value demand in order to reserve

the limited capacities given on a flight for higher-value demand.
II. D ATA A CQUISITION AND F ORECASTING

All instruments used by Yield Management require a well-founded data pool.
This data is gathered using computer-assisted reservation systems, then analyzed and
afterwards fed back in real-time again.
Such databases contain information about the following parameters: 34
 Current bookings
 Course of cancellations
 No-show-behavior
 Load factors
 Development of costs and revenue
 Competitive behavior
 Seasonal influences
In tourism and aviation business the gathering of information is provided by computer-

assisted reservation systems like Galileo or Amadeus.
34
cf. Jörg Lindenmeier, Yield-Management und Kundenzufriedenheit: Konzeptionelle Aspekte und empirische Analyse am Beispiel
von Fluggesellschaften, DUV-Verlag, 2005, Page 12
Julius Neubauer 21
Forecasting now builds up on this pile of data to generate forecast models regarding
the following factors: 35
 Future level of demand
Input for allocation
 Expected course of bookings
 No-Show prospects
 Go-show prospects Input for overbooking control
 Cancellation rate
In command of this specific knowledge, we can now proceed to the next chapters.
III. A LLOCATION
The main task of allocation is the assignment (or combination) of available capacities
to different booking classes. Several different techniques can be applied for this
purpose, distinctive in their complexity and implementation possibilities in practice.
But the corporate objective remains the protection of fixed contingents for higher-
value demand. 36
The following techniques are widespread and applied in practice:

 Limiting curves
 Constant allocation
 Nesting
 Network YM - Virtual Nesting
To prevent misunderstandings, I would briefly like to explain the term „booking class“:
The available seats on an aircraft are generally divided into three compartments:
First / Business / Economy. Nowadays only two of them are offered on most
continental flights: Business and Economy. These physical compartments (generally
differing in comfort, space and on-board service provided) are now further divided into
several booking classes (also called virtual compartments). These virtual compartments
are simply different price ranges with a fixed contingent of seats within a physical
compartment.
First
Business
First
Economy 1 First
Business Economy 2
FIGURE 16: SPLITTING OF PHYSICAL- Business
INTO VIRTUAL COMPARTMENTS Economy 3
Economy
Economy Economy 4
Economy 5
Economy 6
physical compartment virtual compartment
35
36
cf. Weiß, Häußler, 2005 Page 9
Julius Neubauer 22
1. L IMITING CURVES
This technique has appealed to many companies. It forecasts the course of booking,
based upon statistics and courses of booking of past and present databases. This
results in an individual pattern for each single flight offered by an airline. To allow for
unpredicted random fluctuations in demand, so called “puffer zones” are taken into
account. The so generated limiting curves form the upper and lower limit of the actual
demand development. 37
Upper Limit
Predicted course of Lower Limit

booking
Predicted course of
booking
52 40 25 15 10 5 3 1 0 52 40 25 15 10 5 3 1 0
Weeks before departure Weeks before departure
FIGURE 17: PREDICTED COURSE OF BOOKING FIGURE 18: CALCULATED PUFFER ZONES
CALCULATED BY A FORECAST MODEL
The following figure shows a fully implemented limiting curve on a flight with 3
booking classes available:
8
100%
7 st
only 1 class available
6
5 Upper limit
Load factor
st nd
1 + 2 class available Lower limit
4
Actual demand
3
2 all 3 classes available for booking

1
0
52 40 25 15 10 5 3 1 0
Weeks before departure

FIGURE 19: FULLY IMPLEMENTED LIMITING CURVE
The basic consideration of this concept is to make an intervention of humans

unnecessary until irregularities occur. This would be the case if the real curve of
demand moved outside of the forecasted limiting curves.38
37
38
Julius Neubauer 23
This means:
 If the demand bursts the corridor on the upper limit, this is a sign of very high
demand for available capacities. Should this occur, the lower-priced 2nd and 3rd
booking classes are closed. This from now on forces the customer to book the
only rate available. If the curve then evens out between the limiting curves, the
second class is made available for booking again.
 If the corridor bursts on the lower limit, this indicates a very poor demand.
Airlines try to countervail this by opening all booking classes. This should
stimulate demand enough to settle down at a constantly increasing rate.
An important requirement for the proper use of this technique is the accuracy of
forecasts. The more inaccurate they are the wider or closer the gap will be between
the limiting curves. Both cases are not desirable. Regarding the first case, the margin of
actual demand would be too big and so the higher-value booking class would never
be exclusively available. Regarding the second case, real demand would often burst the
corridor on the upper or lower limit causing frequent changing of available booking
classes. This would negatively affect demand and considerably increase the
maintenance effort of such a system. Allocation using limiting curves however is very
popular since it is easily feasible and interpretable.
2. C ONSTANT ALLOCATION
Static allocation is seen to be the assignment of capacities of similar kind to different
booking classes. This process is based solely on forecast models of demand for a
particular flight. With this technique the size of each contingent is not changed
anymore after being determined (it remains constant). Thus it is assured that
predetermined capacities are not exceeded
The biggest disadvantage of this technique is that the size of booking classes cannot be
adjusted according to demand. Likewise higher-value requests might be rejected if
there is no capacity available in the favored virtual compartment instead of sourcing it
out into other booking classes with capacity still available.
Total Capacity 100
VC1 60
VC2 30
VC3 10
FIGURE 20: STATIC ALLOCATION OF VIRTUAL COMPARTMENTS (VC)
Julius Neubauer 24
This method of allocation is, due to its simplicity, the most widespread of all. But owing
to its lack of flexibility, it does not appeal to airlines. 39
3. N ESTING
Nesting does no longer assign a constant size to virtual compartments. Instead of that,
each booking class is granted the access to lower-yield contingents (Also called the
integration of virtual compartments into each other).This means that if the capacity of
one specific booking class is depleted due to very high demand, it automatically
obtains access to yet unassigned seats of lower-yield virtual compartments. 40
Example:41
On a flight from Munich (MUC) to Dublin (DUB) 150 seats in all three virtual
compartments are available. The forecast model predicts the following level of
demand:
Virtual compartment Predicted demand
A (Fullfare) 90
B (Eco) 45
C (Eco-special) 15
Five days before take-off the bookings are as followed:

Virtual compartment Total seats Actual demand Seats left
A 90 90 0
B 45 40 5
C 15 8 7
Total 150 138 12
If the 91st request for a seat in compartment A is received at that time, the booking
theoretically will have to be rejected due to insufficient capacities in compartment A.
But this proves to be absurd because the compartments B and C still have sufficient
unassigned capacities. Nesting now allows compartment A to access the capacities of
lower-yield compartments B and C. Consequently the request can be accepted
although the preassigned contingent of compartment A is already used to capacity.
That implies that virtual compartment A is able to use virtually all 150 seats on this
flight. But vice versa the compartment C has no access to B and A, though
compartment B to C but not to A.
Compartment A (Fullfare)
FIGURE 21: BASICS OF NESTING
Compartment B (Eco)
max.
150 max. Compartment C (Eco-special)
seats 60
max. 15 seats
seats
39
40
41
Julius Neubauer 25
4. N ETWORK Y IELD M ANAGEMENT

Up to now, I have only focused on direct flights in this skilled work.
The route structure of an airline develops simultaneously to the continuous growth of
airlines to big international concerns and their permanent expansion to new markets.
The huge number of direct flights causes the route structure to become inefficient and
also very unclear. So there was need for action. The so called hub-and-spoke-system”
was invented and shortly after established by all major airlines.
Hub-and-spoke means that an airline transports its passengers coming from smaller
airports (so called spokes) to the big international ones (hubs) via small aircrafts
(mainly Boeing 737-200 and Airbus A310/20). There, passengers have to change to big
wide body aircrafts (mainly Boeing 747/77 and Airbus A340/80) in order to be passed
on to primary flight routes. Then, after landing on a hub again (mainly that of a partner
airline) the journey continues, after being reallocated to smaller aircrafts, to the
spokes. 42
Spoke
Hub
FIGURE 22: HUB AND SPOKE SYSTEM
This system dramatically increased the load factor within the entire route structure. At
the same time this made the process of allocation considerably more complex because
a route now consisted of multiple single flights instead of one direct flight.
This plus in complexity requires new, more efficient allocation solutions. Such that can
incorporate different combinations of airports of departure and arrival and the valence
of revenue streams linked to it.
42
Julius Neubauer 26
I. VIRTUAL NESTING
This technique combines all booking classes available within the entire route structure
to different categories. These categories are now called revenue classes and no longer
virtual compartments
This appears as follows:
The route Munich (MUC) – Dublin (DUB) via London (STN) can be booked as “direct”
flight (you have to change in STN), or as 2 single flights. The achievable revenues are as
follows:
Revenue: 350€
MUC – DUB (via STN)
Revenue: 250€ STN Revenue: 150€

MUC - STN STN - DUB
MUC DU
B
FIGURE 23: VALUE OF DIFFERENT LEGS AND ITINERARIES
Out of this it is evident that a passenger of the itinerary43 MUC-DUB (via STN) is
charged a higher price (called route contribution) than passengers of both single legs.
44
Based upon this, the passenger of the itinerary MUC-DUB (via STN) automatically
receives the tender, prior to the other two passengers.
Therefore the capacities for this itinerary and its legs would be nested as follows:
MUC - DUB (via STN)

FIGURE 24: VIRTUAL NESTING FOR
MUC – DUB (VIA STN)
MUC - STN
STN - DUB
It should be noted that the offer MUC-DUB (via STN) consists of the simultaneous
booking of both legs (MUC-STN, STN-DUB). The price difference compared to the single
booking MUC-STN and STN-DUB is reached by discounts (because the allocation of
capacities can be improved when flights are booked simultaneously).
43
A route where you have to change the plane in order to reach your destination.
44
The several segments of an itinerary.
Julius Neubauer 27
B. OVERBOOKING CONTROL
To keep the load factor of flights as high as possible, airlines use controlled
overbooking. 45 This means that more seats are sold than actually available. This
becomes necessary due to-short term cancellations and no-show passengers that then
should be compensated through go-shows and overbooked capacities.
This approach requires very accurate forecast models. If the no-show and/or the
cancellation rate are calculated too high, too many passengers are at the gate waiting
for boarding (spill). In this case airlines have to reject passengers (denied boarding).
Compensations, costs issued by overnight stays, upgrades or rebooking to competitor’s
flights occur. This category of costs is called stock-out costs. If the rate of no-show
passengers and cancellations are calculated too low, this may result in unused
capacities. All costs caused by unused capacities are called deadhead costs.
So an airline can proceed in the following ways:
It can offer the flight without any overbooking:
The load factor curve clearly drops in last section due to frequent short-term
cancellations. This entails definitely no stock-out but high deadhead costs.
120%
100%
80%
Load factor
60% FIGURE 25: LOAD FACTOR ON A NON-

OVERBOOKED FLIGHT
40%
20%
0%
0 0,5 1 1,5 2 2,5 3 3,5 4
Days before departure
It can overbook the flight without restrictions:
The load factor curve will clearly burst the maximal capacity of 100% but not
drop low enough in the last segment to transport all booked passengers. This
approach ensures a high load factor, but entails significant stock-out costs.
160%
140%
120%
Load factor
FIGURE 26: LOAD FACTOR ON A OVERBOOKED 100%

FLIGHT WITHOUT RESTRICTIONS 80%
60%
40%
20%
0%
45
0 0,5 1 1,5 2 2,5 3 3,5 4
American Airlines have detected that a non-
overbooked flight has an average load factor of 85%.
Julius Neubauer 28
It can apply an optimized overbooking rate, based on forecasts:
These forecasts include rates of cancellation, rebooking and go-show

passengers. This approach ensures a relatively high load factor, with the load
factor curve clearly bursting the maximal capacity, but still dropping back close
to it again. The difference of the two curves should then exactly be the amount
of no-shows:
140%
120%
100%
FIGURE 27: LOAD FACTOR ON A FLIGHT WITH
Load factor
80% OPTIMIZED OVERBOOKING RATE.

60%
40%
20%
0%
0 0,5 1 1,5 2 2,5 3 3,5 4
The optimal overbooking rate can also be seen as a trade-off between

deadhead and stock-out costs:
Deadhead costs
Stock-out costs
FIGURE 28: CALCULATION OF

Costs
OPTIMAL OVERBOOKING RATE

optimal
overbooking rate
0 5 10 15 20 25 30 250 40 45 50
Overbooking rate in %
The overbooking rate can be considered as optimal if the total amount of

costs caused by both deadhead as well as stock-out costs is as minimal as
possible. This means that bookings will probably be accepted as long as the
hence resulting revenue is bigger than the costs emerging if a customer has
to be rejected.46
The above mentioned optimized overbooking rate is influenced by several factors: 47
 Historic no-show behavior:

Contains information about no-show rates of past flights. (same in route, day,
time and virtual compartment)
46
47
Julius Neubauer 29
 Percentage of business and private travelers:

Due to the higher rebooking/no-show rate of business travelers, this has to be
taken into account. 48 The higher the percentage of business travelers on a
flight, the higher it is overbooked.
 Number of flights per day:
The more flights per day are offered by an airline (having the same
destination), the higher each flight can be overbooked, because rejected
passengers then don’t have to wait a long time until the next flight takes off.
 Remaining time until take-off:
The more time remains until take-off, the higher the overbooking rate. It then
declines by time elapsed. In this case, the overbooking rate is not statically
shaped (as in figure 25 to 27), but gradually. Figure 29 illustrates that:
160%
140%
120%
FIGURE 29: GRADUATED OVERBOOKING
Load factor
100%
RATE
80%
60%
40%
20%
0%
0 0,5 1 1,5 2 2,5 3 3,5 4
In case a flight should be overbooked despite an optimized overbooking rate being

utilized, airlines apply a technique called „voluntary denied boarding”. This technique’s
aim is to encourage passengers to voluntarily renounce transportation if they are
awarded certain amenities. Such as upgrades to higher compartments of a later flight,
hotel vouchers or compensatory payments. 49
To sum it up, is to say that overbooking affects allocation. Thus the appliance of both
should be planned at the same time, which is very difficult to implement due to the
complexity of both. Therefore the optimal overbooking rate is first calculated in
practice as it provides the base for allocation.
48
To reduce the amount of passenger not showing up, many airlines conduct so called flight checks. In the course of a flight check,
every single passenger is called and asked if he/she will definitely show up.
49
Julius Neubauer 30
VIII. SOFTWARE - NAVITAIRE “SKY PRICE”

As already mentioned, IT-based Yield Management
Systems require for very sophisticated hard- and
particularly software solutions. Nowadays, many
airlines have decided to outsource these processes. This means that they acquire
the usage rights of a software and computing power offered by external companies.
The only thing they basically then have to do is integrating the software into
the existing IT-infrastructure and input the necessary parameters. Such solutions
are provided by several companies:
 JDA Software
 Ideas
 Amadeus
 Sabre
 Lufthansa Systems
 PROS
 Revenue Management Systems, Inc.
 The Rainmaker Group
 Navitaire
1. COMPANY OVERVIEW50
Navitaire is a subsidiary company of Accenture, focusing its business on outsourcing
services for airlines. The Company started off as PRA Solutions in 1993. At that time it
offered revenue accounting solutions to major carriers. In the following years the
company developed the via World Network as a cost-saving alternative to other GDS
(Global Distribution System) systems like SABRE, Amadeus, Galileo and Worldspan
(merged in 2006). In 2000, Navitaire acquired the Open Skies airlines reservation
division from HP which is still in use today at major low-cost carriers like Ryanair.
Below you can see a short summary of Navitaire’s most important customers: 51
50
cf. Company Overview, www.navitaire.com/company, As at 3.3.2009
51
cf. Customers, http://navitaire.com/company/customers_all.asp, As at 17.3.2009
Julius Neubauer 31
2. “SKYPRICE”
Navitaire SkyPrice is an integrated price
and revenue optimization system. It aims
at low-cost carriers offering several
booking classes that have no differentiation other than price. This challenges
traditional revenue management theory which is based on passenger segmentation by
fare classes and demands for new solutions. SkyPrice contains several algorithms and
forecast models that can manage pricing and allocation simultaneously.
SkyPrice is based on 3 stacks:
 Optimization,
 Analyzing
 Integration
Optimization:
The optimization stack uses data collected by CRS systems to forecast parameters like:
 Demand: The Software offers the possibility of involving special events,
holiday seasons and other influencing factors.
 No-show rate: Offers the option of using only segment-specific data to gain
more precise forecasts.
The Optimization stack also calculates the size of virtual compartments and
overbooking rates by utilizing complex mathematical algorithms like EMSRb (Expected
Marginal Seat Revenue) developed by MIT. EMSRb enables airlines to optimize
revenues even further, but requires powerful IT infrastructure.
Analyzing:
SkyPrice provides information about cost structures, competitor’s prices compared to

yours and comprehensive access to all available flight data. It also enables you to easily
create performance reports and immediately share them within the entire company.
Integration:
One of the software’s aims is to flawlessly integrate itself into existing IT-infrastructure
and communicate with other components and allow for easy interaction via flexible
and simple user interfaces (UI).
All data that is processed by the software is stored in Navitaire’s data centers which
are located in Minneapolis, London and Sydney. That helps reducing maintenance
costs and increases security.
Julius Neubauer 32
IX. CONCLUSION
Yield Management is one of the most revenue-affecting processes in airline business.
The additional profit attributed to the implementation of Yield Management Systems
at American Airlines amounts to 500 million US-$ each year.
The future development of Yield Management particularly depends on IT-

infrastructures. The amount of decisions to be made by an integrated, IT-based Yield
Management System is enormous. This amount can be illustrated by the following
example:52 Lufthansa offers approximately 1500 flights per day. Each of them is split
into 15-20 virtual compartments nearly 200 times before take-off. Considering that a
flight is available for booking nearly one year in advance, this results in a huge
workload of the IT-based Yield Management But this amount will constantly increase
over the next years, which calls for very sophisticated hardware solutions.
Yield Management can also affect customer satisfaction, either by not accepting a
customer request or rejecting him shortly before take-off due to overbooking. But also
if he gets to know, that his seatmate has paid a much lower price than he did for one
and the same service. Therefore customer satisfaction should be valued more than
revenue maximization because without the former, the latter could never be reached.
52
Julius Neubauer 33
X. APPENDIX
Correspondence with Mr. Riess:
From: Riess, U. - VIEPV [Udo.Riess@KLM.COM]

Sent: Montag, 16. Februar 2009 08:56
To: Julius Neubauer
Subject: RE: Anfrage Diplomarbeit
Sehr geehrter Hr. Neubauer,
Interessantes Thema das Sie sich da gewaehlt haben !

Unsere Niederlassung in Oesterreich ist ein integriertes Sales und Marketing Team, fuer Air
France und KLM.
Wir haben hier keine Ertragssteuerung in Wien, unsere Tarife werden von unserer Regional
Direktion in Genf mit Paris und Amsterdam ausverhandelt, daher sehen wir hier kaum
Mitarbeiter aus dem Yield Management, des jeweiligen Hauptbueros.
Ich kann Sie in Evidenz halten sollten wir einmal einen Besuch in Wien haben, es ist jedoch so,
das die Ertragsteuerung das Herz eines Unternehmens in der Flugbranche ist und es sich hier
sicher um sensible Informationen handelt die nicht gerne nach aussen getragen werden.
Die Basics nehme ich an sind Ihnen sowieso gelaeufig.

Ich werde Ihren Kontakt und Ihr Interesse auch intern weitergeben
Mit freundlichen Gruessen

Udo Riess
From: Julius Neubauer [mailto:neubauer.julius@inode.at]

Sent: Sunday, February 15, 2009 5:21 PM
To: Riess, U. - VIEPV
Subject: Anfrage Diplomarbeit
Sehr geehrter Herr Riess!

Mein Name ist Julius Neubauer und ich bin Schüler des 5. Jahrganges an den Kärntner
Tourismusschulen in Villach.
Im Rahmen meiner Matura schreibe ich derzeit an einer Diplomarbeit welche das Thema Yield
Management bei Fluglinien behandelt.
In dieser Arbeit habe ich die Theorie des YM bereits umfangeich abgehandelt, es fehlt mir
jedoch der Bezug zur Praxis, also wie YM bei Airlines zum Einsatz kommt.
Deshalb habe ich von Frau Orasch vom Kärntner Reisebüro Ihre Kontaktdaten erhalten um
mich mit Ihnen in Verbindung zu setzen.
Nun wollte ich Sie fragen, ob Sie mir mit Informationen weiterhelfen könnten oder evtl. mit
einem persönlichem Interview.
Mit freundlichen Grüßen
Julius Neubauer
Julius Neubauer 34
Correspondence with Mr. Juds:
From: Juds Benjamin [benjamin.juds@germanwings.com]

Sent: Mittwoch, 18. Februar 2009 15:53
To : Julius Neubauer
Subject: AW: Anfrage wg. Diplomarbeit
Hallo Herr Neubauer,
wir benutzen das Navitaire Revenue-Management-System „SkyPrice“. Dies berechnet aus

historischen Daten der für einen Flug festgelegten Referenzflüge (ähnliche Wochentage,
Flugzeiten, Saisonalität, usw.) unterschiedliche Preis-Absatz-Funktionen im Zeitablauf, anhand
derer dann die optimalen Preise im Zeitablauf und dementsprechenden Kontingente
berechnet werden.
Mit freundlichem Gruß,
Benjamin Juds
Von: Julius Neubauer [mailto:neubauer.julius@inode.at]

Gesendet: Montag, 9. Februar 2009 14:50
An: Juds Benjamin
Betreff: AW: Anfrage wg. Diplomarbeit
Sehr geehrter Herr Juds,

in meiner Arbeit habe ich die Theorie bereits umfangreich abgehandelt, es fehlt mir noch der
Bezug zur Praxis!
Also wie YM jetzt wirklich bei einer Airline angewendet wird, wie Sie zB: Überbuchungen
handeln, wie die Überbuchungsraten festgelegt werden, mithilfe welcher Kriterien Sie
Marktsegmentierung betreiben und in welche Segmente Sie einteilen, welche Methoden der
Kontingentierung Sie anwenden etc..
Anmerken möchte ich noch, dass meine Arbeit nicht veröffentlicht wird, da es sich nur um
einen Modul meiner Reifeprüfung (Matura) handelt.
Vielen Dank für Ihre Bemühungen!
Mit freundlichen Grüßen

Julius Neubauer
Julius Neubauer 35
Air transportation numbers, provided by Statistik Austria (www.statistik.at)
Julius Neubauer 36
Passenger arriving in and departing from Vienna International Airport, provided by

Satistik Austria (www.statistik.at)
Julius Neubauer 37
A snapshot at European and north Atlantic transportation numbers, provided by

ICAO (www.icao.int)
Julius Neubauer 38
XI. BIBLIOGRAPHY
Air charter [Online] // en.wikipedia.org. - March 15, 2009. -

http://en.wikipedia.org/wiki/Air_charter.
Allianz (Luftfahrt) [Online] // de.wikipedia.org. - January 27, 2009. -

de.wikipedia.org/wiki/Allianz_(Luftfahrt).
An Introduction to Airline Economics, 6th edition [Book] / auth. O'Connor William E.. -
Connecticut, London : Praeger, 2001.
Betriebswirtschaft, Volkswirtschaft und gastgewerbliche Betriebslehre [Book] / auth.

Reith Wolfgang and Sator Manfred. - Wien : öbv&hpt, 2002. - Vol. 5.
Codesharing [Online] // de.wikipedia.org. - February 2, 2009. -

http://de.wikipedia.org/wiki/Codesharing.
Company Overview [Online] // www.navitaire.com. - March 3, 2009. -

www.navitaire.com/company.
Customers [Online] // www.navitaire.com. - March 17, 2009. -

http://navitaire.com/company/customers_all.asp.
Flag carrier [Online] // en.wikipedia.org. - March 15, 2009. -

http://en.wikipedia.org/wiki/Flag_carrier.
Fluggesellschaft [Online] // de.wikipedia.org. - January 26, 2009. -

http://de.wikipedia.org/wiki/Fluggesellschaft.
Introduction to oneworld.pdf [Online] // www.oneworld.com. - January 27, 2009. -

www.oneworld.com/content/factsheet/W1_2009-01-08 introduction to oneworld.pdf.
Luftverkehr, Betriebswirtschaftliches Lehr- und Handbuch, 3. Auflage [Book] / auth.

R. Sterzenbach and R. Conrady. - München : Oldenburg Verlag, 2003.
Revenue Management am Beispiel von Airline Revenue Management,

Hauptseminararbeit [Book] / auth. Weber Christoph. - University of Köln : GRIN-
Veralg, 2007.
Scheduled Air Transport [Online] // en.wikipedia.org. - January 26, 2009. -

http://en.wikipedia.org/wiki/Scheduled_air_transport.
Skyteam Fact Sheet [Online] // www.skyteam.com. - January 27, 2009. -

www.skyteam.com/downloads/news/facts/skyteamFactSheet.pdf.
Julius Neubauer 39
Staralliance Facts&Figures [Online] // www.staralliance.com. - January 27, 2009. -

http://www.staralliance.com/de/press/facts_figures/index.html.
Strategic Management for Travel and Tourism [Book] / auth. Evans Nigel, Campbell
David and Stonehouse George. - Oxford/Boston : Butterworth-Heinemann, 2003.
The Theory and Practice of Revenue Management [Book] / auth. Talluri Kalyan T. and
Ryzin Garrett Van. - Berlin : Springer, 2005.
Yield Management – Konzepte und Techniken. Studienarbeit [Book] / auth. Weiß

Matthias and Häußler Steffen. - University of Hohenheim : GRIN-Verlag, 2005.
Yield Management am Beispiel einer Fluglinie. Studienarbeit [Book] / auth. Fricke

Marco. - University of Hamburg : GRIN-Verlag, 2005.
Yield Management bei Fluggesellschaften. Hausarbeit [Book] / auth. Axt Martin. -

University of Eichstätt-Ingolstadt : GRIN-Verlag, 2004.
Yield Management und Kundenzufriedenheit: Konzeptionelle Aspekte und

empirische Analyse am Beispiel von Fluggesellschaften [Book] / auth. Lindenmeier
Jörg. - Berlin : DUV-Verlag, 2005.
Julius Neubauer 40

Airline Yield Management

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A IRLINE Y IELD May

Julius Neubauer, 5BT

II. DECLARATION OF INDEPENDENCE

Villach, May 2009

III. TABLE OF CONTENTS

II. DECLARATION OF INDEPENDENCE ................................................................................................ 2

III. TABLE OF CONTENTS .................................................................................................................... 3

IV. TABLE OF FIGURES ........................................................................................................................ 4

V. PASSENGER AVIATION IN GENERAL .............................................................................................. 5

1. EUROPEAN BEGINNINGS ....................................................................................................................... 5

VI. YIELD MANAGEMENT 101 .......................................................................................................... 11

VII. INSTRUMENTS USED BY YIELD MANAGEMENT ...................................................................... 14

1. MARKET SEGMENTATION ................................................................................................................... 14

VIII. SOFTWARE - NAVITAIRE “SKY PRICE” ..................................................................................... 31

1. COMPANY OVERVIEW ....................................................................................................................... 31

IX. CONCLUSION .............................................................................................................................. 33

XI. BIBLIOGRAPHY ........................................................................................................................... 39

IV. TABLE OF FIGURES

V. PASSENGER AVIATION IN GENERAL

FIGURE 2: US-AIRLINE DEVELOPMENT FROM 0

The most important airlines at this time were:

An airline generally provides air transporation services for passengers or freight,

Year 1994 1995 1996 1997 1998 1999 2000 2001

FIGURE 3: DEVELOPMENT OF AIRLINES COMPARED TO STRATEGIC ALLIANCES

•United Airlines •American Airlines •Delta Air Lines

FIGURE 4: MEMBER AIRLINES RANKED BY PASSENGER NUMBERS

C. AIMS AND BENEFITS OF STRATEGIC ALLIANCES 12

Market-directed Business-directed Customer

Technical Frequent flyer

FIGURE 5: AIMS AND BENEFITS OF STRATEGIC ALLIANCES

FIGURE 6:BOARDING PASS OF A CODE SHARED FLIGHT:

VI. YIELD MANAGEMENT 101

Sell at Discount Fare:

FIGURE 7: BASIC IDEA OF YIELD MANAGEMENT

The figure below illustrates this correlation:

Marketing Yield Management

Product Price Capacity

FIGURE 8: CORRELATION BETWEEN MARKETING AND YM

FIGURE 9:US-AIRLINE ROUTE STRUCTURE

3. REQUIREMENTS FOR THE IMPLEMENTATION OF YM

 Sale of a product prior to its use:

VII. INSTRUMENTS USED BY YIELD MANAGEMENT

The segmentation of a total market often becomes necessary because it consists of

The objective of market segmentation is to split the collectivity of demanders into

Private travelers basically differ from business travelers in their behavior of

FIGURE 10: TYPICAL TIMELINE OF RESERVATIONS OF PRIVATE AND BUSINESS TRAVELERS

FIGURE 11: DEVELOPEMENT OF PASSENGER VOLUME IN GERMANY, SORTED BY OCCASION

 A low-priced rate that is though endued with serious restrictions (called

FIGURE 12: IMPACT OF PRICE RANGES ON THE CONTRIBUTION MARGIN

Yield Management differentiates prices as follows: 30

Weekly price fluctuation P1 P2 P3

02:00 – 19:00 19:00-02:00

The purpose of demand management is to assign a priority to each single booking

 The incoming lower-value demand would occupy valuable seats at an early

FIGURE 15: IMPACT OF DM ON THE REVENUE

Hence it is economically reasonable to reject lower-value demand in order to reserve

II. D ATA A CQUISITION AND F ORECASTING

Such databases contain information about the following parameters: 34

In tourism and aviation business the gathering of information is provided by computer-

The following techniques are widespread and applied in practice:

physical compartment virtual compartment

Predicted course of Lower Limit

2 all 3 classes available for booking