YIELD MANAGEMENT AT LITTLE AIR CASE STUDY

Al Little spent a semester of his university degree on exchange in London, England, and as a result fell in love with the English culture. After graduating, he wanted to start a business and also be able to visit London frequently. He reasoned that if he enjoyed London so much, others would also go more frequently if the right opportunity was available. As such, he started an airline, Little Air, that flew from Toronto to London and back 3 times a week. Having not understood the yield management portion of his operations course (that part of the course was a blur to him), he decided to use a simple, one-price system, and charged a round-trip price of $500 per seat. Reasoning that everyone would want to take advantage of this opportunity, he rented the largest plane he could, a 400-seat 747. Unfortunately, the plane regularly flew at much less than capacity and Al was quickly running out of funding. As a result, he dusted off the yield management notes he took in class and finally understood that a multiple price, multiple class system could result in higher profits. As a result he categorized customers based on length of stay, time of year, and amenities provided during the flight. He began selling deep discount seats for $100, discount seats for $400 and full-fare seats for $1000. This improved revenue significantly. He typically sold from 30 to 50 full-fare seats (Table 1), 70 to 100 discount seats (Table 2), and 100 to 150 deep discount seats on each trip. However, he was still not able to obtain profitability due to the plane not being completely full. As a result, he terminated the lease on the 747 and rented a more fuel-efficient 100-seat plane. At this point, though, Al needs assistance. He could fill his plane with deep discount and discount flyers, but it would be unprofitable to do so. Further, he still has trouble understanding the overbooking portion of yield management. As such, Al needs some consulting guidance. Consulting Assignment Al has hired you as a consultant to advise him on pricing, overbooking and seat allocation decisions. Demand history from 40 flights on the larger plane is provided in Tables 1 and 2 in the Excel file. For example, the full-fare history for observation 1 indicates that 5 reservations were obtained 6 months before the flight, 6 reservations were obtained 5 months before, and so on. Demand history for deep discount seats is not necessary because 100% of them are taken as soon as they are offered. Also note that in observation 1, of the 53 reservations in the system the week before the flight, 34 actually boarded the plane. Al always refunds the price of the ticket when a passenger does not show up, since this is similar to policies some airlines have for their very best, most expensive seats. Al believes all passengers should be treated the same in this regard and thus refunds all no-shows. Overbooking too many seats can be quite costly. Al estimates his per passenger penalty of not getting on that flight is $200 times the number of passengers that dont get on squared. (These customers are always placed on other flights and so their ticket price is not refunded to them.) So having one person not get on the flight costs $200, two people costs $800, three costs $1800, and so on.

Currently, Prices start at $1000, $400, and $100 for the three fare classes. Prices can be raised by 10% to $1100 or $440, lowering demand by 15%, or prices can be reduced by 10% to $900 or $360, increasing demand by 15%. Prices on deep discount tickets cannot be changed. Determine appropriate pricing, overbooking and seat allocation decisions for Al. When the game is played in class, you will start 6 months before the flight with your initial decisions, and you will be able to adjust these decisions (if you want to) as the time of the flight approaches. The demand history in Tables 1 and 2 can be used to determine threshold curves for each class of passenger, and these can be shown in tabular or graphical form. Graphical threshold curves are given in the Excel file these are based on average demand for the last 40 flights. It is important that you understand these curves in order to make informed decisions during the game. It will especially help if you can develop these curves in tabular form before the game is played.

Table 1: Full Fare History

Obs. == 1 2 3 4 . . . 39 40 Boarded == 34 26 27 36 1 == 53 40 42 43 2 == 51 40 39 40

Net Reservation Activity Weeks from Event

3 == 37 29 30 28 4 == 28 18 22 21 5 == 23 16 15 17 6 == 16 14 15 11 7 == 15 12 13 10 8 == 13 10 10 11 12 == 8 6 7 6 16 == 9 7 6 6 20 == 6 5 6 5 24 == 5 5 4 4

33 40

42 56

37 51

34 38

18 29

17 23

13 15

11 14

10 14

7 12

7 8

5 7

4 7

Table 2: Discount Fare History

Obs. == 1 2 3 4 . . . 39 40 Boarded == 87 81 65 57 1 == 88 85 70 57 2 == 90 87 71 58

Net Reservation Activity Weeks from Event

3 == 92 88 73 59 4 == 90 87 70 62 5 == 84 81 69 58 6 == 76 75 67 55 7 == 71 67 62 47 8 == 59 60 53 38 12 == 47 46 41 31 16 == 36 34 29 23 20 == 24 21 22 16 24 == 14 12 16 11

100 105

101 111

103 113

105 115

104 114

102 110

95 104

85 93

71 79

57 65

44 50

32 32

21 19

Developed by Ken Klassen, Brock University Adapted from the Motherland Air Case developed by Richard Metters, Emory University

To prepare for class: Download the file with the data from Sakai. You will play the game with your project team, so you will want to work on the following with them to prepare for class: 1. Determine an overall pricing strategy for the game. How will this change during the game as the time of the flight gets closer? What could cause it to change? (calculations are not necessary for Question 1) 2. Determine an overbooking policy for both discount and full fare customers using the method discussed in class. This will require using the data in a spreadsheet to speed up the calculations. How might this policy change as the time of the flight gets closer? What could cause it to change? 3. Determine a seat allocation policy using the method discussed in class. How might this change during the game as the time of the flight gets closer? What could cause it to change? 4. Be sure to combine all 3 decisions, creating a single yield management policy. (this will probably at least partly happen as you work through questions 2 and 3). IMPORTANT: Seat allocation must be given to the instructor in a nested or cumulative form. In the following example, 10 seats are allocated for deep discount fares, 20 for discount fares, and 70 for full fares (this is not a good policy it is only an example).

Full Disc Deep Disc

100 30 10

In addition, if 5 seats are overbooked for discount and 6 overbooked for full fare, the policy would change to:

Full Disc Deep Disc

111 35 10

5. Come to class with the following: a. Your initial pricing decisions for 6 months before the flight for Full and Discount passengers. b. Your initial seat allocation decision for 6 months before the flight for Full, Discount, and Deep Discount passengers. c. Print out the threshold curves (net reservation activity charts) to use during the game. It will especially help if you can develop these curves in tabular form before the game is played.