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How to execute yield management the right way… NOT the United Airlines way


I’m pretty sure everyone is still in shock by the images and videos of a passenger being forcefully dragged off an overbooked United Airlines flight departing from Chicago and leaving to Louisville. According to eyewitnesses, United was trying to make room for four employees of a partner airline, and so some passengers who paid for their flight had to sacrifice their seat. Even though some incentives were offered to passengers, there was not a single person who was willing to give up his/her seat. Subsequently, the United flight staff selected four passengers at random who were approached to leave the plane. Three passengers got off, but the fourth refused which resulted in him being violently dragged off the plane by city aviation department security officers.

Many people have wondered how could United have been able to overbook the flight? In this day and age of intelligently interconnected application platforms with built-in ticketing verification systems it would seem impossible for such a large airline to make a mistake as overbooking a flight.

Fact to the matter is that all airlines tend to overbook their flights most of the times and the reason can be summarized in two words: yield management. Yield management is defined as the process of examining and factoring in consumer behavior to achieve the maximum amount of profit from goods and services provided. The idea is to coordinate timing, price, buying and consumption patterns to achieve the best return. Consumer buying habit is carefully examined to determine the correct price level to make the item enticing to the client. E.g., when the demand is low, the company might choose to drop the prices to attract customers and when capacity is reaching its limit, the company may decide to increase its prices. Another key aspect of yield management is the analysis of consumer behavior to determine the level of actual consumption of goods and services acquired. Especially when capacity is an issue, companies attempt to predict the level of “no shows” in order to leverage on transactions. In the specific case of the airline industry, experience has learned that there is a certain amount of passengers that do not show up for a flight, even though they purchased a tickets. Reasons for no show can be due to last minute cancellations and flight rescheduling, illness, forgetfulness and so on. Using this knowledge, airlines often take risks and sell more tickets than the actual number of seats available on the plane. The issue with (aggressive) yield management is that it can often result in shortage of seats when the forecast in the number of “no shows” do not turn out as expected. And that was probably what had happened in the United case.

So there are always risks and discomforts involved in yield management and the inconveniences for customers need to be dealt with accordingly.




Here are some key recommendations for businesses whenever there is probability of customer distress as a result of yield management strategies.

Be transparent about pricing and booking policies

Make sure customers are aware that your pricing system is based on supply and demand and that they can expect to pay higher rates when capacity reaches its limit. Many companies include information in their pricing policies and terms and conditions to properly inform their customer base about price fluctuations. Companies should furthermore inform customers in advance that overbooking may sometimes happen.

Prepare your staff to deal with customer distress

When the predicted number of no shows turn out to be wrong, the company personnel should be well prepared to deal with capacity issues. The proper mindset to maintain when dealing with these situations is that “it is not the customer’s fault”. Personnel should therefore be adequately trained to openly communicate with customers and to come up with creative and pragmatic solutions that would be beneficial for all parties.

Offer attractive incentives and rewards when predictions fail

Overbooking practices often can help companies boost their revenues by 10 to even 25%, resulting in significant financial contributions to the bottom line. So whenever overcapacity occurs, companies should gracefully accept their error and take a small hit for the mishap. Consequently, the company must be willing to offer monetary or other forms of incentives to customers for inconveniences caused. In the case of United Airlines, the passengers were offered up to $1,000 in compensation however that was not enough to volunteers to deplane. Considering the additional returns the company gains from yield management, it wouldn’t have hurt to offer an even higher sum to passengers to encourage them to give up their seats. A couple of hundred dollars extra would have probably solved the problem that surged.

The forcible removal of a passenger has now resulted in a damaged reputation of the airline and generated way more costs since the backlash led the airline to refund the fares of all passengers aboard the United Express Flight a couple of days after the incident.

Yield management is a key practice of operations management that is applied by many companies to maximize revenues. However, as I mentioned earlier, yield management strategies — when aggressively applied — may often cause discomforts to costumers. So whenever predictions fail and capacity challenges emerge, companies need to be able to have contingency plans in place to relief consumer distress.

E.E.

Our course Operations Management discusses many aspects of operations strategies, design, performance and improvement, and we pay particular attention to the do’s and don’ts of yield management. Visit our website for more information about our courses, workshops and other services.

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