One Price Doesn’t Fit All

Not long ago, I spent the better part of an afternoon at the Philadelphia airport with a small group of fellow refugees. We were The Overbooked: our money and luggage had been collected by the airline, but we were left milling at the departure gate, wondering why a company would sell tickets when there are no more seats.

Overbooking, I’ve learned, is a conscious attempt to balance the increased revenue from flying a full aircraft against the cost of leaving castaways behind. It’s a gamble airlines rarely lose: with a reliable estimate of how many passengers will cancel or no-show, they can fill every seat available-and have some paid for twice.

These are the economics of yield management, a business strategy that a former chairman of American Airlines called “the single most important development in transportation management since we entered the era of (U.S.) airline deregulation in 1979.” He said yield management would provide the airline with at least $500 million a year in revenue for the foreseeable future.

Simply put, yield management is a way to make sure you sell the right product to the right consumer at the right time for the right price. A better name for it is “revenue maximization,” says Sam Barone, a Nepean, Ont.-based consultant with ties to both the trucking and airline industries.

It’s a deliberate strategy of revenue and capacity management. To fill every seat and increase their average revenue per passenger-mile, airlines entice travellers with a vast array of prices, terms, and conditions. It makes sense, notes Barone, since no two passengers value air travel exactly the same way.

“Say we’re sitting next to one another on a plane to Vancouver,” he says. “You booked four weeks ahead and plan a Saturday stop-over. I bought my ticket at the gate and want to come home the next day. You planned your purchase. I’m desperate to fly. If you’re the airline, you’re going to charge me more for that ticket, and I’m going to pay it. That’s because I’m flying on my terms, not the airline’s. The more demanding I am and the less certainty I represent as a customer, the more I’m going to pay.”

If you have a deep understanding of why each customer is buying your service, you can create a multi-tiered rate structure that plays to their demands and your operational needs. It’s a strategy a lot of trucking companies use today, but informally and not to nearly the extent they should.

“Logically, your premium product, which has to go today and be there tomorrow, should cost more,” Barone says. “Conversely, a customer who only has one regularly scheduled load every week at the same time to the same place, and you know that he’s going to leave you 30% capacity, is going to get a more marginal price. But only if he agrees to some conditions: he’s not allowed to increase the load, change the destination, or otherwise disrupt the certainty he’s been able to offer as a customer.”

Compared with the airlines, of course, there’s no shortage of low-price trucking operations. If you must discount, question how much to discount, to whom, and when, and then consider how it will affect your available capacity. “If prices are going south, and they have overcapacity, airlines ‘down-gauge’ to a smaller airplane,” Barone explains. “So they keep the frequency of the flight, but match capacity to demand. That’s why in the morning you’re on a 767, and at 2:30 you’re on a DC-9.”

Most importantly, you have to decide whether you want to be a discount operator at all, Barone says. “Too many trucking companies are rooted in cost-plus pricing. They offer the lowest rate they can to whoever they can. Many shippers will pay for a higher level of service, but every shipper will take a low rate if you offer it.” When you set your prices, he says, the goal shouldn’t be just to fill the truck, but to make the most money doing it.

As for me and the rest of The Overbooked, you’d be surprised how much goodwill a ticket voucher will buy-and how much interest an extra $500 million a year can generate.

Just ask American Airlines.