Yield Management: A Double-Edged Sword


By Alan R. Bender, associate professor of aeronautical science
 
Those who blithely champion yield (or revenue) management technologies need a reality check. It is nave, nay dangerous, to purport that these systems are simply tools to maximize airline revenues while providing passengers with the fare options they desire. That description is merely the official party line.

In most domestic markets, the large U.S. air carriers use yield management software for a far less sanguine purpose: discrimination -- based not on age, race, or gender, but on competition, geography, and personal circumstances.

In today's deregulated environment, airlines can and should exercise their right to charge whatever the market will bear. But what about the common practice of applying monopolistic strangleholds on the terminal gates at certain airports in order to jack up ticket prices at those public facilities? And what of doing just the opposite in competitive markets: selling floods of seats at penny-ante fares on specific routes where new carriers are attempting to gain footholds? At best, these are anticompetitive practices; at worst, they are outright violations of the Sherman Antitrust Act.

Yield management is one of the most important tools in the high-cost (read: inefficient) carriers' arsenals to wage war on small, low-cost airlines and extract monopoly rents from the traveling public. In many short- and medium-haul markets radiating from so-called "fortress" hubs, the traditional carriers (American, Delta, Northwest, United, etc.) offer only very limited fare options; on those routes, advance purchase tickets are uncannily expensive while walkup (last minute) fares are utterly outrageous. More important, ticket prices in those markets have little or no relationship to actual operating costs; in practical terms, monopolistic walkup fares are the equivalent of charging $20 for a quart of milk in a community where the next grocery store is 300 miles away.

Yield managers apportion the number of seats at each fare level or "bucket." However, since nearly all prices are excessive in airline markets lacking low-cost competition, the only choices are among "high," "higher," and "highest." How would you like to live on an island where you were free to purchase any new automobile you desired -- as long as it's a Cadillac, Mercedes, or Lexus?

The residents of many cities in the Northeast, upper Midwest, and mid-South are confronted with short- and medium-haul fares that range from expensive to usurious. Although yield managers do not actually devise ticket prices, they are, in effect, the tariff "enforcers."

The high-cost carriers take a completely different approach on competitive routes such as those flown by low-cost firms, including Southwest Airlines, American Trans Air, and a host of smaller lines. Short of dropping those routes, the inefficient firms have few real options. They are obliged to offer a variety of deals in the face of no-frills competition because "a seat is a seat is a seat" to most passengers. The 208 different fare offerings in the intensely fought Orlando-Washington market is just one example of market (not cost) based pricing. The fact that the highest fare on this route ($1,960) is nearly 1,200 percent that of the lowest ($166) is an unmistakable sign of a free market gone berserk. Yield managers usually ensure that at least a few very expensive seats are held until departure time for high rollers and those in need -- folks who have little choice but to be legally "robbed."

Let me be clear. I am a strong proponent of yield management systems. It would be imprudent for an air carrier not to deploy this valuable technology. Even low-fare airlines use yield management software because they, too, need to scientifically size and resize their fare buckets according to booking patterns. However, as a rule only large, high-cost firms use yield management to engage in openly anticompetitive practices. The general consensus is that "capacity dumping" -- unloading huge numbers of seats at below-cost prices -- greatly magnifies the predatory pricing threat already facing no-frills carriers.

To claim that the first inputs into ticket pricing schemes and, therefore, yield management systems, are cost-related is fiction. Many of today's domestic tariffs bear little relation to flight mileage and, therefore, to actual operating costs. It is unnerving to call a travel agent or log onto the Internet and discover excursion fare differentials of 500 percent and more among major jet routes of identical length. Ring up a big airline and ask for some fare information; the damning evidence is only a phone call away! As long as system revenues exceed system expenses, the older carriers are content.

Congress, the Justice and Transportation departments, and business and civic leaders nationwide are furious over abusive market-based pricing schemes and widespread capacity dumping.

Yield management software has the potential to do society far more good than harm. Ethically operated systems ingeniously allocate output according to the needs and budgets of providers and users: a textbook example of high-tech free enterprise. Conversely, unethically programmed and operated systems have become the cyber-equivalent of the 19th century corporate "octopus" -- flooding contested markets with torrents of below-cost products while choking off the availability of affordable goods elsewhere.

The use of yield management to deliberately undermine the competitive marketplace is a sure-fire prescription for "well intentioned" government intervention. Although it is currently under review by the Transportation Department, such action could prove far more damaging than the problem itself. The sorry road to reregulation begins the moment Washington starts telling carriers precisely how many seats they can sell at a given price.

The only reasonable solution is self-regulation. The major carriers need to limit their responses to low-cost competition to defensive rather than offensive measures. Even remotely hostile yield management tactics must end.

The airlines have no place to hide. If they do not regulate themselves, politicians and bureaucrats will delight in doing it for them. Guaranteed.

The views expressed in "Perspectives" are those of the writer and not necessarily Embry-Riddle's.