Transportation Yield Management

Transportation Yield Management

For a yield management strategy, two variables influence significantly the rate (fare or toll) being charged to use a given transport supply (scheduled flight, ship, road, etc.):

  • Remaining capacity. As the available remaining capacity declines, it becomes more valuable with fares increased accordingly. The last remaining capacity can be offered at a high cost to see which user is willing to pay to access it. For instance, an airline often keeps a few seats to make them available in the week before a scheduled flight to cater to time-constrained customers (e.g business) willing to pay a higher price for the seats.
  • Remaining time. Transport supply is made available at a specific point in time (t), implying that it is scheduled. As the remaining time before a scheduled capacity decreases and if the capacity is not hired, the fare will be reduced in the hope that a taker will be found until the fare reaches operating costs. For domestic flights in the United States, prices generally drop until 30 days before departure, and then they start going up as airlines manage the remaining capacity to maximize revenues.

Operating costs are the fare below which it is preferable not to offer the capacity even if it is available. For instance, an airline company will not sell a seat on a flight at a cost that is below its operating costs (mostly fuel), even if the seat would, therefore, remain empty. Prices that are too low may also create expectations from users that they are the norm, which will change their future economic behavior.