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February 08, 2006

Comments

Ron Baker

Thank you for your question J.E. I'm asked this all the time, as if I don't know the airlines are sub-optimal from a profitability standpoint.

But Yield management (YM) is emphatically NOT responsible for the mess the airlines are in. In fact, if it wasn't for YM, the airlines could not operate. Imagine an airline that had only one single price for every customer, no matter when they book, what the routing, etc. It's simply not economically viable.

YM is used by the cruise ship, hotel, rental car, retail and other industries that have perishable inventory/seasonal demand; high fixed costs and relatively low marginal costs; and fixed capacity.

I could have just as easily put a picture of a hotel or cruise ship and made the exact same point, and certainly those industries are profitable. Southwest Airlines, also profitable, uses YM, as do the low-cost carriers in Europe, most of which are profitable as well.

YM is a euphemism for price discrimination, a practice that is ubiquitous in the marketplace––that is, charging different customers different prices based on value, not cost. Think of the range of prices you can pay for a Coke: At Costco, Safeway, a restaurant, bar, or vending machine. All the same Coke, same cost, radically different prices. Same concept as YM.

Why are the airlines in terrible shape? Too much capacity since we won't let any of them fail. Also, each country heavily subsidizes its flagship carrier, adding to the over-capacity problem. Moreover, we've only deregulated 1/3 of the industry––the routes and pricing. The FAA and the airports are still inefficiently run by the government, as evidenced by the new TSA––Thousands Standing Around––and, up until recently, the FAA being the largest customer for vacuum tubes.

I hope this clarifies my post, and answers your question regarding the economics of YM, and how it can be used to enhance law firm economics.

J.E. Storm

I understand the point being made, but can you follow up to explain how this yield management is *not* responsible for the terrible shape airlines are in?

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