Revenue Management in the Airline Industry Thesis

Revenue Management in the Airline Industry - Thesis Example The law of supply and demand has always been institutional in the business literature and practice. Even as commerce started to flourish, merchants already had to make demand-management decisions specifically in terms of structure, pricing, and quantity in the hope of maximizing profit and avoiding loss (Talluri and van Ryzin 4). However the old idea of RM as businesspeople perceive it three decades ago until now is different in the sense that revenue management focuses on the way decisions are made through a technology-based system (not theoretical therefore) which should be more responsive to the uncontrollable and hardly predictable variables and constraints in a certain industry (Talluri and van Ryzin 4). The airline services sector was the first to employ the principle of revenue management. The efficiency of reservation control systems was based on quantitative researches which centered on â€Å"controlled overbooking† (McGill and van Ryzin 233). Overbooking depended on the probability of the number of passengers who shows up during boarding time (McGill and van Ryzin 233); and which is technically necessary in effort to replenish the could-be lost in revenues in case of cancellations or no-shows among passengers (Belobaba et al. 93). In an industry with low marginal costs, fixed capacity, perishable product, irregular demand, and varied market segments such as the aviation industry, excess inventory may be minimized by forecasting through historical data in order to maximize revenues (Dunne and Lusch 42). Airlines during the 1970s started offering restricted discount rates where passengers in the same aircraft compartments have actually paid different prices (McGill and van Ryzin 234). Prices were offered at a different range at predetermined periods to different market segments without having to compromise the level of travelling experience. Therein, comes the groundwork for yield management which was later called, revenue management. This principle was first grasped by Kenneth Littlewood of British Overseas Airways Corporation (BOAC, known today as the British Airways) in his mathematical proposition that in adopting discount schemes, the value they yield should exceed the expected return of future full fare bo okings (qtd. in McGill and van Ryzin 233). (BOAC was offering discount rates for customers who reserved for seats twenty-one days before the actual time of flight). In the United States, the American Airlines adopted the same scheme through its Super Saver Fares in 1977 which would later be encapsulated in the RM framework especially after the passage of the Airline Deregulation Act of 1978 that paved the way for the wide practice of such principle in the modern business context (Hall 600; McGill and van Ryzin 234). Before the deregulation, US airlines were controlled by the Civil Aeronautics Board (CAB). The pricing schemes underwent dramatic change after the deregulation where new low-cost carriers threatened major carriers. The