According to professors Gary and Nash (2009), yield management refers to an integrated business process that involves an elaborate understanding, predicting, and controlling of consumer behavior for the purposes of maximizing profits or yields from a predetermined perishable resource, for instance, hotel room or airline seats reservation. As an inventory-based approach of the revenue management, yield management entails strategic control of inventory, so as to sell products and services to the right clients, for the right price, at the right time. The concept of yield management leads to a ticket pricing by the passenger airline that can range from free to thousands of dollars on the same plane.
There are many ethical dilemmas, surrounding yield management by the passengers of airlines and hotels. For instance, Airbus A320 11.35 a.m. flight from Minneapolis to Anaheim, California, charged its passengers at different rates ranging from $0 for the frequent flyer programs and connections to $817 for the first class. The variation in ticket charges seems so huge considering that all the air passengers travelled between Minneapolis and Anaheim on the same flight, on the same day and at the same time. This trend also cascades into the hotel industry whereby a hotel would offer the same kind and quality of services to customers at different rates, as determined by pricing system of the yield management.
Many travelers find it quite unacceptable and largely unethical to realize that persons sitting next to them in the airbuses paid much lower air fare, than they did. A large percentage of travelers feel that they have been fleeced by the airline. Although this kind of a pricing system is denounced as unethical practice, “theories of economics and pricing models fully justify the application of yield management in the airlines and hotel industries” (Brown and Holme, 2011). This paper attempts, therefore, to discuss the pros and cons of yield management.
Pros of the Yield Management in the Airline Industry
In the case of passenger airline, the capacity of the aircraft is considered as fixed, therefore, there is a dire need for the proper utilization of the available space, and all the profit or yield has to be realized, regardless of the levels of existing demand for its service. It is the most imperative thing to note that “any unused facility or seat within the aircraft would automatically lead to a significant loss after the departure” (Brown and Holme, 2011). The unutilized facilities and space of the airline are deemed to have “perished”, if they have not been sold before the aircraft’s departure, because they cannot generate any income for the entire period of the flight (from its departure to arrival at the next destination).
To save airlines from incurring heavy losses accrued from an imminent underutilization of the on board facilities due to decreased demand for the airline services, the new pricing system is introduced to promote the use of unsold seats. Once the airline has determined the number of unsold seats after the total reservations, discounts will be computed on all the remaining empty seats to encourage more passengers to book for the particular flight. Suffice it to say, all the discounted air fares will be far much cheaper than the ones for the reserved seats.
Most significantly, the airline makes it a priority to capture the varying enthusiasm of the clients to pay for the services through the principle of market segmentation. Under this strategy, the airline will repackage its service into different categories to match the varying needs and tastes of its clients. For example, the different clients will opt to pay for the first class, executive and economy classes, according to their willingness to pay. During reservations, those who are willing to pay more are given preference.
In general, yield management has been incorporated into the world’s leading airlines and hotels to protect them against incurring heavy losses that would come as a result of significant reduction in the airline passenger traffic and customer flow. The pricing system is so far the most reliable loss reduction mechanism, commonly used by the airline to maximize profits from its operations.