Laurie Garrow · Transcript · · Updated
01A Introduction to RM and this course – Transcript
Video by Laurie Garrow · Watch the original on YouTube
Summary
AI-generated from the transcript. Verify details against the source video.
- Lori Garrow explains that revenue management is a set of business practices and techniques used to maximize revenue and profitability by managing inventory.
- American Airlines developed the first yield management or revenue management approach in the early 1980s following the deregulation of the US airline industry.
- Low-cost carriers introduced one-way pricing and simplified product structures, leading to the development of new demand forecasting approaches for undifferentiated products.
Use this video with Pro
Reading, copying and transcript downloads are free. Create saved AI results for this video with a signed-in Pro account ($9/month).
Transcript
Search ignores accents. All transcript text stays visible.
hi and welcome to this course on Revenue management my name is Lori Garrow and I will be your instructor for this course before describing the course I thought it may be helpful to give you a bit of background about myself and my inspiration for Designing the course I'm a professor in the school of civil environmental engineering at Georgia Tech and I've been at Georgia Tech since 2004.
my primary area of research is focused on demand modeling for air transportation and understanding how individuals make travel decisions so for example how do customers decide what to get to purchase and how do they make trade-offs among price Airline departure time and other factors associated with that ticket in 2023 I started a new Central Georgia Tech called the air transportation Lab
at GT or ATL at GT this Center focuses on modeling demand and developing Revenue management approaches or RM approaches as they're called for short for commercial airlines multiple Airlines and RM software companies from throughout the world are participating in this new center as part of the center's launch I met with potential members many of which are directors of their respective Airline RN departments or our Executives at
companies that are developing RM software products and solutions these leaders provided me with input into how they make their hiring decisions and specifically the RM skills and knowledge that they are looking for so after meeting with these leaders I was inspired to develop this course with the goal of better preparing you our students for pursuing careers in aviation and revenue management now representatives from these Airlines and software companies who are
participating in the new center will be coming to Georgia Tech this semester and it's my hope to be able to facilitate opportunities for those in this class to interact with these Airline experts and open the door for you to potentially interview for internships and or permanent positions with these companies if you're interested so with this is background let's talk about Revenue management or RM is there are three key learning objectives
for this lecture in this lesson you will learn what Revenue management or RM is why it's important and when it's typically used we'll also see how the airline industry and revenue Management in particular has evolved over time and how deregulation of the airline industry spurred the creation of RM we'll also look at how RM has and continues to be influenced by capability
of different distribution channels so what is revenue management well there are different definitions of RM that are used in the literature and the popular press we're going to look at three of them and then talk about how these definitions are similar or how they differ the first definition states that Revenue management is selling the right product to the right customer
at the right price so we're selling a product to a customer at a particular price the second definition defines Revenue management as a set of business practices these business practices are used under certain circumstances with the goal of maximizing Revenue the third definition notes that Revenue management is a business technique and
this technique enables the optimization of your inventories and maximizes your profits okay so let's look at these definitions note that both the second and third definitions refer to RM as a set of business practices or business techniques this is important because it reflects the fact that RM is not simply a software product or a set of math algorithms that operate in isolation without human interaction
effective RM systems provide recommendations and guidance but there is a strong human element involved that both helps guide the type of recommendations produced as well as how these recommendations are implemented for example has anyone ever been bumped from a flight or accepted compensation to go on a later flight well did you know that you are more likely to be bumped on certain airlines that is an RM system for JetBlue and
Delta May provide the same recommendation on overbooking a flight but because JetBlue management has a lower risk tolerance they rarely if ever overbook your flights this is one example how about how RM in practice involves a mix of technical approaches and business objectives the second and third definitions also point to different objectives of RM in one definition the goal is to maximize Revenue
in the second definition the goal is to maximize profits honestly the specific objective function or what you're optimizing doesn't really matter the key is that these objective functions can vary across Airlines and as a function of circumstances or data availability for example if you had detailed operating costs for different aircraft types then one Airline might decide to incorporate that information into their
arm system to maximize profits however if another airline operated a single aircraft type they may decide to optimize revenues since there would be little variation in variable operating costs during the pandemic we actually saw many smaller Airlines started to maximize available cash on hand as their objective function so what is important here is not the exact objective function but rather in Revenue management we're managing or
optimizing an objective that are one way in another relates to revenue or money the first and third definitions provide insight into how we are maximizing Revenue profits or other objective function we do it by managing inventory which in essence means we are deciding how many seats to sell at a particular price I could sell 100 seats on an aircraft at a hundred dollars or I can decide to
sell 80 seats at 100 and 20 to 500. RM is a process by which we decide how many seats to sell at these different price points to effectively offer different price points though we have to spend the market the first definition reflects the fact that it's not only deciding how many products to sell and at what price but rather deciding the right product to
sell at the right customer or to the right customer segment at this price so broadly speaking we can see RM is a process of deciding how many seats to sell and what price in a given Market in such a way that we optimize revenue or profitability or other metric and also in a way that accounts for specific business philosophies or practices at an airline Revenue management started in aviation
shortly after the U.S airline industry was deregulated in the early 1980s the airline industry was very different than it is today before deregulation Airlines were told basically where to fly and what price to charge it was also difficult for new Airlines to enter the market after deregulation however Airlines had more freedom to decide where and when they wanted to fly and it was much easier for new Airlines to enter the market
oftentimes these new Airlines had much lower operating costs than the established Airlines because they were essentially starting from scratch load factors were also much lower meaning that in the 1980s we were flying a lot of aircraft in the skies that had empty seats there was a lot of pressure at this time to increase Demand by lowering prices and a lot of schedule changes as Airlines learned which routes were the most profitable and moved capacity to
these higher profitable markets within a few years after deregulation there was widespread discounting by new entrants in the market and many Legacy Airlines were seeing big losses in response American Airlines developed the first RM approach which was called yield management or ym at the time now this was a response to the problem American Airlines was facing at the time that is at the time Airlines offered one price on a flight for a given class of
service and there was concern that it would be stupid basically to offer multiple prices for a given class of service like coach because two customers sitting next to each other would compare notes and figure out what they paid and the one who paid more would be angry that is at the time there was concern that differential pricing in a given class of service would not be accepted by the public however RM American Airlines took a
chance their RM approach was a response to this problem of facing the industry and by creating Revenue management they were able to offer two to three different fares on the market for a given class of service thereby offering discount fares to compete with other carriers while still maintaining their profitability stated another way RM was not the cause of deep discounting illogical prices and Industry losses going on at the time
which is a misconception but RM or ym was developed in response to these problems now yield management or Revenue management may not be applicable to every Market or situation but it does provide product designers more flexibility and the potential for better matching Supply and the product offering with customers desire and willingness to pay
well we saw in the definition that it's applicable under certain circumstances one of those circumstances is that RM is used when you have perishable inventory meaning you can't keep it or use it forever an airline seat is perishable because when the airplane takes off nobody wants to buy the seat anymore you can't use it many goods are perishable hotel rooms
sporting events bananas you name it RM is also used when you can design products and sell to micro segments that is RM only works if you can segment the market and design products in a way where customers with higher willingness to pay can buy the higher priced product and are blocked or somehow prevented from buying the lower price product
through different restrictions this is important to prevent dilution stated another way selling the micro segments works when you have different customers who have different preferences behaviors and willingness to pay for the same or similar product and can sort these customers or identify them based on these behaviors and sell them a product that's close to their willingness to pay in preferences so in Airlines a coach seat on an
airplane is basically a coach seat on an airplane right but because business passengers don't tend to know their travel plans well in advance you can design a discount product for leisure passengers that can be purchased 14 to 20 days in advance of departure this is one way the airline industry designs products to serve micro markets or micro segments in this case they are targeting business versus Leisure micro segments
so why do we want to sell to micro markets or micro segments well because offering just one product in price leaves money on the table this is an example of a price demand curve note it's not linear as the price increases or goes from left to right we see the demand decreases for a given price shown on the chart there are certain number of passengers
who will purchase an airline seat the revenue the airline gets from selling seats at this price is reflectured in the captured Revenue box above this box we have unrealized demands unrealized demand is demand that we don't get or that we don't quote unquote realize because the price is too high we can think of unrealized demand as stimulated demand that is additional demand we would have gotten if the price
had been lower or the additional demand that would have been stimulated to travel if the price goes from say a hundred dollars on the right to a lower price of 75 dollars closer on the left to the right of the cash or Revenue box we have diluted Revenue dilution occurs when an individual pays a certain price for an airline seat say a hundred dollars but would have been willing to
pay more say a hundred and fifty dollars if you are able to offer multiple price points you can capture more Revenue under this curve however to get this to work you have to make sure that your demand is segmented to avoid dilution if you simply offered two fares in the market and call them Fair a and fair B and made them identical profit you know products offered both except a was five