https://www.nytimes.com/1987/03/04/business/the-art-of-devising-airfares.html
THE ART OF DEVISING AIR FARES
By Eric Schmitt
March 4, 1987
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In the airline business, it is sometimes called the dark science.
The latest round of fare wars, however, has put a spotlight on how carriers use state-ofthe-art computer software, complex forecasting techniques and a little intuition to divine
how many seats at what prices they will offer on any given flight.
The aim of this inventory, or yield, management, is to squeeze as many dollars as
possible out of each seat and mile flown. That means trying to project just how many
tickets to sell at a discount without running out of seats for the business traveler, who
usually books at the last minute and therefore pays full fare.
Too many wrong projections can lead to huge losses of revenue, or even worse. The
inability of People Express to manage its inventory of seats properly, for example, was
one of the major causes of its demise.
''It's a sophisticated guessing game,'' said Robert E. Martens, vice president of pricing
and product planning at American Airlines, the carrier that has the most sophisticated
technology for yield management, according to airline analysts and consultants. ''You
don't want to sell a seat to a guy for $69 when he's willing to pay $400.'' It May Be Easier
Now
With the industry now adopting very low discount but nonrefundable fares, the complex
task of managing seat inventory may become easier because airlines will be better able
to predict how many people will show up for a flight.
Some airlines have already seen a drop in their no-shows, which means they can
overbook less and spare more customers from being bumped. The nonrefundable fares
could also enable carriers to sell more discount seats weeks before a flight, rather than
putting them on sale at the last minute in an effort to fill up the plane.
American's inventory operation illustrates just how complicated the process can be. At
the airline's corporate headquarters here, 90 yield managers are linked by terminals to
five International Business Machines mainframe computers in Tulsa, Okla. The
managers monitor and adjust the fare mixes on 1,600 daily flights as well as 528,000
future flights involving nearly 50 million passengers. Their work is hectic: A fare's
average life span is two weeks, and industrywide about 200,000 fares change daily. Few
Discounts on Fridays
American and the other airlines base their forecasts largely on historical profiles of each
flight. Business travelers, for example, book heavily on many Friday afternoon flights,
but often not until the day of departure. The airlines reserve blocks of seats for those
frequent fliers. Few, if any, discounts are made available.
''Good luck getting a 'Q fare' from New York to Chicago on Friday afternoon,'' said James
J. Hartigan, president of United Airlines, using the industry's parlance for the low-priced,
supersaver ticket. ''It's like winning the New York State Lottery.''
The same route at midday on a Wednesday, however, begs for passengers, so the airline
might discount more than 80 percent of its seats to draw leisure travelers and others with
more flexible schedules. Passengers Angered
Many passengers, attracted by advertisements trumpeting deep discounts but unaware
that fare allocations change from flight to flight, have expressed anger at the carriers and
travel agents when the cheap seats were unavailable. To help clear up the confusion,
Continental Air Lines is now running ads noting the relative demand of certain routes,
thus giving some sense of the supply of discount seats.
Overbooking, too, is based on the computerized history of flights and their no-shows, and
involves a myriad of factors that include destination, time of day and cost of ticket.
The airlines have used inventory management for decades, but its importance in helping
carriers to enhance their revenue coincides with new software developed in the last three
or four years, analysts and airline executives said. Some of the software has been
developed in-house; other systems have come from such companies as the Unisys
Corporation and the Control Data Corporation.
''It's probably the No. 1 management tool required to compete properly in this highly
competitive airline environment,'' said Lee R. Howard, executive vice president of Airline
Economics, a Washington-based consulting firm.
Effective inventory management alone can improve an airline's revenues by 5 percent to
20 percent annually, analysts estimated. Mr. Martens said American's system was worth
''hundreds of millions of dollars'' a year to the airline. The airline's total sales exceeded
$6 billion last year.
''The revenue implications of yield management are enormous,'' said Julius Maldutis,
airline analyst at Salomon Brothers.
Inventory management improves a carrier's load factor, or ratio of seats filled. Every 1
percent increase in the load factor translates into $10 million in revenues for the typical
major carrier, analysts said. 'Crystal-Ball Gazing'
As sophisticated as it is, however, yield management is still subject to variables beyond
its control. ''Yield management is about 70 percent technology and 30 percent crystalball gazing,'' said Robert W. Coggin, assistant vice president of marketing development at
Delta Air Lines. Bad weather or a last-minute switch to a plane of a different size can
wreak havoc with weeks of planning, he said.
At American, inventory management begins 330 days before departure. Yield managers
use the profiles of a flight's history to parcel out an alphabet soup of fares, rationing fullfare coach seats first, then moving down the price scale.
In the following weeks, the computer alerts the managers if sales in a particular fare
class pick up unexpectedly. If a travel agent booked a large group of passengers far in
advance, for example, the computer would flag the large order and yield managers would
restrict or expand the number of seats in that category. Otherwise, managers begin
checking all fare mixes regularly 180 days before departure, adding or subtracting seats
in each according to demand.
The process continues right up to two hours before boarding, according to American's
director of yield management, Dennis M. McKaige. Airlines typically put more discount
seats on sale just before an advance purchase requirement expires, he said. Therefore, a
new batch of cheap tickets that require a 30-day advance purchase might go on sale 31
days before departure.
A cut-rate fare offered on Monday might be sold out by Wednesday, then suddenly
reoffered hours before takeoff on Thursday if passenger projections based on previous
flights fail to materialize, Mr. McKaige said.
There are some instances when an airline actually gives preference to discount travelers
over customers paying full fare. American has recently developed software to increase
the yield on flights through its hubs. American gives preference to a passenger flying on
a discount fare from Austin, Tex., to London through Dallas, over another passenger
paying full fare from Austin to Shreveport, La., through Dallas. The London passenger,
who pays $241 each way, is worth more to the airline than the passenger flying to
Shreveport, who pays the full fare of $87 each way.
For the bargain hunter, finding a discount will increasingly depend on the season, day
and time of travel, destination and length of stay. The New Fare Cuts
Continental and Eastern, both units of Texas Air, ignited the latest round of rock-bottom
fares in January with ''maxsaver tickets,'' which require a minimum two-day advance
purchase and are nonrefundable.
''The spread between our highest and lowest fares is much lower than other airlines,''
said James O'Donnell, vice president of marketing at Continental. ''While our yield
management job is no less important than other airlines', it is easier.''
Mr. O'Donnell said the carrier's system was more automated than those used by some of
its competitors.
The two-day purchase requirement has siphoned off some business travelers who would
otherwise have paid full fare. (American and several other airlines last week abandoned
plans to raise the lowest discount fares and increase the advance purchase requirement
on the cheapest tickets to 30 days, from 2. The airlines backed away from the changes
when support for the proposal collapsed.) Airline officials said that nonrefundable tickets
were here to stay. Mr. Martens said that since the nonrefundable, maxsaver-type fares
were introduced, American's no-show rate had dropped ''substantially below'' the usual
range of 12 to 15 percent. Passengers who are willing to commit themselves to a
particular flight in exchange for lower prices allow yield managers to refine their
operations by concentrating on the remaining coach seats. HOW TWO FLIGHTS
COMPARE ON TYPE OF SEATS SOLD Both examples are based on one-way fares for
actual American Airlines flights from La Guardia to Dallas/Fort Worth on a DC-10, which
has coach capacity of 258 passengers. PEAK FLIGHT Fri., Feb. 13, 5 P.M. Full coach
($230 or more) 89 seats Intermediate discount ($80-$229) 146 seats Deepest discount
($79 or less) 0 seats* Empty 23 seats OFF-PEAK FLIGHT Wed., Feb. 11, 1 P.M. Full coach
($230 or more) 6 seats Intermediate discount ($80-$229) 138 seats Deepest discount ($79
or less) 40 seats Empty 74 seats *Such seats may have been available, with certain
restrictions on sales, but none were sold. (Source: American Airlines)