Yield Management Pricing, Explained



    Following the Airline Deregulation Act of 1978, former American Airlines CEO Robert Crandall introduced yield management to the air industry, revolutionizing how airfares are set. The backbone of any airline’s ticket-booking sales strategy, yield management involves the optimization of two polarized factors: fully-booking flights to minimize the cost per passenger, and selling as many seats as possible at full price to maximize revenue.

    Before yield management became standard practice, airlines set fares through manually controlled overbooking, offering discount seats to passengers who booked well in advance of takeoff. This generated profit from seats that might have gone unsold, but also presented a problem: How many unsold seats should be kept on reserve to be sold at full price to passengers who booked closer to takeoff? Reserving too few full-price seats would lead to an influx of demand, angering late-buying consumers expecting to get on a last-minute flight, while reserving too many might result in some seats not being sold at all in the final days, reducing revenues for the airline.

    Thanks to Crandall’s innovations, airfare pricing is now a much less precarious balancing act. In accordance with yield management practices, airlines closely monitor the number of seats sold in each booking class or “bucket,” dynamically updating the booking class ratios depending on how quickly seats are selling. If sales are slow in the weeks preceding a flight, more seats might be listed in the discounted bucket than on the same flight during busier seasons. Prices are more likely to increase in the last few weeks preceding the date of departure as more seats are sold and competition increases, but there can still be last-minute price drops in the final few days.

    The introduction of yield management resulted in a far more dynamic booking system than what was previously implemented. While still not perfect, significant computational advances since yield management’s induction have increased the system’s effectiveness, leading to more efficient bookings, higher profit margins, and most importantly, more satisfied customers.

    While Crandall’s innovations simplified pricing for airlines – myths about optimal booking windows and ticket pricing hacks run rampant among consumers. Read “Cost Confusion” in The Technology Issue.