Yield Management
A R C H I V E
Asking for money: the benefits case 9.5.01 Andrew Conry-Murray Network Magazine |
10 ways to build better technology company Andersen Consulting 10-step plan 9.25.97 S.Russel Craig Upside Magazine |
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Funding requests usually must be accompanied by numerous financial documents. Bob Wooten, author of Building &
Managing a World-Class IT Help Desk (McGraw-Hill Companies, 2001), offers a simple alternative to complicated
financial paperwork. Known as a "benefits case," it lists essential funding information without descending into
accounting hell. The following excerpt is used with permission of the publisher. Anytime you want funding for
something, you need to convince the people with the money why they should give you some. A business case can
be a complicated form that details balance sheets, income statements, marketing plans, and competitive surveys. A
benefits case is much shorter and shows a simple form of a proposal's costs and returns.
The most important section of a benefits case informs the audience of the value and ROI that their money will
receive. For example, saying you need another person because everyone else is overworked may be true, but the
executives will have a hard time seeing what return they will get. Saying the new person will decrease problem
resolution times and expand help desk operating hours should work better. Just as you should focus your benefits
toward the reader, you should also make the results as measurable as possible. As the prior example showed,
expanded hours and a decrease in problem resolution times can be measured-and therefore the return is more
easily seen. There are costs to most benefit cases, and you would be wise to recognize them. Also, the cost
section needs to show the timing of the monetary needs: It may be an initial outlay of cash, or it may be a leasing
program that spreads the cost over three to four years.
Let's walk through a case as if we were planning to purchase a call management package for a help desk.
Benefits-Revenue Installing a call management pack- age will not generate any revenue for our
initial purposes, so that column is zero. Benefits-Productivity Increase For this case, the largest benefits will come
from an increase in productivity. Using the system, the agents should be able to answer questions more quickly
and get the businesspeople back to work faster.
Benefits-Cost Reduction There is a fuzzy distinction between increased productivity and cost
reduction when it comes to the impact on associates' time. If the software package in this example allowed the
agents to go home earlier, then the impact would be recorded in cost reduction. If it allowed them to have more
time to do other work, then the amount would go in increased productivity. Other proposals will have a clearer
distinction. The important part of cost reduction is following up after implementation to ensure the costs are actually
being reduced.
Benefits-Other This section is for any other benefits that will be achieved. They may have a dollar
impact or something less firm to measure. One example could be increased customer satisfaction.
Costs-Acquisition Acquisition cost is the cost of purchasing, hiring, leasing, or renting any asset to
achieve the proposed item.
Costs-Associate Time Associate time cost is found by taking the number of people needed to
implement the project, multiplying by their rate, and multiplying again by the amount of time needed to finish the
project. Full-Time Equivalents (FTEs) may be used here. They are convenient to use when the project will require
parts of many people's time. For example, the call package may need a LAN administrator, some PC installers, and
a trainer. Without using the FTE plan, the project costs may look like:
LAN installation: March 1--March 31 Two PC installers: March 15--May 30 Trainer: May 1--May 30
Looking only at times may cause the benefits case writer to calculate costs based on 18 weeks. This would not be
accurate because the people are not working on this project full-time. The FTE calculation could be done this way:
LAN Administrator tasks: 10 days PC installation: 20 days Training: 10 days
This total equates to 40 FTE days and more accurately reflects the cost of the project.
Costs-Outside Services Outside services are costs incurred by bringing in outside partners to help
you with the project.
Costs-Other Other costs include anything that does not fit nicely into the previous cost sections.
Annual ROI The ROI is the sum of the benefits minus the sum of the costs. Many times the benefits
of a proposal will not be realized until it has had time to grow. Costs, as well, may decrease over time, allowing
later years to increase in return vs. the first year. Cumulative ROI Where the annual return column shows benefits and costs for each year, the cumulative column shows the net increase or decrease when the years are combined. This allows the reader to see the year in which the return is made. |
11.3.97 Wall St Journal p1
"They've got you and they know it", grumbles construction executive Tony Konosky, who recently wasted a week
trying to find a ticket from Houston to Bombay, India for less than $2500. "It's like there's a target on your
chest." Such tactical tools have transformed airline economics during the past year. Fare sales once were few and fleeting when traffic was strong and fares were high, as has been the case this year. But with a firmer handle on the demand for high-fare business tickets, carriers have run almost continuous leisure salaries and significantly expanded the supply of cheap, advance-fare seats. For business travelers, that has meant packed planes as well as high fares. Load factors- the percentage of seats filled - have run at record levels, more than 70%, and many popular flights are completely filled all the time. "Ten years ago I would have said to you we probably couldn't get load factors as high as they've been in 1997", says Robert Crandall, chairman and chief executive of American Airlines and its parent AMR Corp. This fal, American will begin phasing in a new, even more powerful yield-management system that is expected to boost its annual revenue by as much as $200 million. With surprisingly high traffic and fares in September, airlines are posting record third-quarter earnings. Unit revenues are at all-time highs, and 1997 will mark the third-consecutive year of record profits for the airline industry, a milestone reached only twice before in its regulated days. What's more, an expected record 1998 will mark the first time in aviation history of four consecutive record years of profits. Airlines also have benefited from a strong economy, limited capacity increases and muted competition, particularly among low-fare start-ups. But many executives say airlines have simply learned to more effectively price their product, instead of attacking each other to gain market share. Major carriers have grown reluctant to undercut each others' fares, knowing retaliation can be expensive. Besides, airlines have found that business travelers are more swayed by convenient schedules and frequent-flier programs than by price. Because of such factors, and heavy demand, carriers have readily endorsed each others' business-fare increases rather than trying to undermine them. "We've evolved from one of these cataclysmic, WWIII industries to some equilibrium that's good for shareholders and employees and communities." says Gordon Bethune, Continental Airlines' chairman and chief executive. Much of that pricing mastery has come from recent advances in yield management, which began as simple overbooking of flights. Before deregulation in 1978, all carriers offered the same government-set fares; discounts were rare beyond night or weekend flights. People Express introduced low fares nationwide in the early 1980s; old-line carriers with higher costs, couldn't match without losing millions. In response, Mr. Crandall developed the first true yield-management system. It allowed American to offer a limited number of seats on a plane at a People Express price, while still selling high-fare tickets to business travelers. Those early systems, however, lacked the computing muscle to track booking trends or to gauge the systemwide impact of seat-filling discounts offered on an individual route. Inevitably, carriers either sold too many cheap seats and left behind big-ticket customers, or held back too many business seats and flew sparsely filled airplanes. But in 1988, Bell Laboratories patented a mathematical formula that could perform rapid calculations on fare problems with thousands of variables. That led to further advances in software, enabling yield- management gurus to use simple business computers to perform complicated fare-crucnching and seat-allocating that even a Cray supercomputer couldn't handle just a few years before. By meshing massive historical databases on ridership with up-to-the-minute bookings, carriers could predict with almost pinpoint accuracy how many business customers would want seats on a particular flight. As a result, "high fares get higher and low fares get lower," says Robert Cross, whose Aeronomics Inc. sells yield-management systems to airlines. Indeed, the resulting price spread can be staggering. Take Flight 2015, American's popular 5:30pm departure from Chicago to Phoenix. Its 125 coach seats are divided among seven fare "buckets", with round- trip tickets ranging from $238 to $1404. In the weeks before each Chicago-Phoenix flight, American's yield- management computers constantly adjust the number of seats available in each bucket, taking into account tickets sold, historical ridership patterns anc connecting passengers likely to use the route as one leg of a longer trip.
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With 69 of 125 coach seats already sold four weeks before one recent departure of Flight 2015, American's computer began to limit the number of seats in the lower-priced buckets. A week later, it totally shut off sales for the bottom three buckets, priced $300 or less. To a Chicago customer looking for a cheap seat, the flightwas "sold out", although advance-purchase fares were still available to New York-to-Phoenix customers connecting in Chicago, because the overall fare structure for that one-stop trip was higher and because American had lots of seats available on the connecting New York-Chicago flights.
One day before departure, with 130 passengers booked for the 125-seat flight, American still offered five seats at full fare because its computer database indicated 10 passengers were likely not to show up or take other flights. Flight 2015 departed full and no one was bumped.
While carriers boast that yield-management allows them to extend leisure discounts to more travelers and reserve seats for their best customers critics contend that it amounts to hig-tech scalping. "Yield management is good for airlines, but it certainlu isn't good for travelers." says Nancy Barrows, chief operating officer of Woodside Travel Trust, a major corporate-travel agency. "It's pushed business fares artificially high."
The effects are most striking in airline hub cities, where one carrier can dictate pricing. In Denver, where UAL Corp.'s United Airlines is king, business fares are up 24% - and leisure fares are down 51%. In Dallas, where American dominates, business fares are up 26%, while leisure fares are down 20%, according to American Express.
Philadelphia-to-Houston has one of the highest average fares of any U.S. route of under 1500 miles. Business fares there are up 18% this year, according to Topaz Enterprises Inc., a Portland Oregon airfare-auditing firm, even though US Airways Group has added two nonstop flights to compete with rival Continental, which dominates with 66% of the market.
Tanker-ship manager Kevin Coyne's company recently paid Continental $1484 for a one-day trip to Houston. In contrast, Philadelphia-based chemical executive Dan Smith drove 90 minutes and made the same trip from Baltimore, where Continental competes with low-fare Southwest Airlines. "It makes no sense to me", says Mr. Smith, who paid Continental a mere $280.
Competitive pressures aren't likely to drive business fares down, thanks to Airline Tariff Publishing Co. Located in a black-glass building at Washington, D.C.'s Dulles Airport, ATPCO is owned by a group of 24 international cirlines, including the seven largest U.S. carriers.
Every carrier sends its fare changes to ATPCO, whose centralized computer
system sends a download seven times a day to computer-reservation systems used by travel agents - and to the
airlines themselves. The system was started by the industry's lobbying group, the Air Transport Association, before
deregulation. Airlines contend it still is necessary to make sure fares are posted world-wide simultaneously and
correctly.
ATPCO says its 2 mainframe computers create a perfect marketplace, akin to a gas-station owner being able to
watch prices his competitor posts across the street. "The reason for our being is to allow carriers to as easily as
possible manage their fares and get them into the marketplace", says Michael Ferrier, ATPCO's president.
Indeed, ATPCO insures that no pricing change goes undetected. some airlines' internal computers suggest
responses to ATPCO-announced fare changes, based on the competitors' market-share and other factors. A few
carriers even allow their computers to automatically change fares though most require a human to sign
off.
At Houston-based Continental, pricing experts meet three times daily to review ATPCO-reported fare changes, especially those involving Continental's major business routes. Within minutes, a Continental response can be on its way back to ATPCO with a simple keystroke or one-page fax. "We tend to always match" fare changes, says James Compton, Continental's head of pricing.
Consumer advocates argue that ATPCO lessens pressure to lower prices because it removes competitive fears. In a 1992 crack-down, the Justice Department did bar airlines from using ATPCO to post or "signal" proposed fare changes and then withdraw them if competitors didn't go along. Now a fare change must be available as soon as it goes into the central computer.
During the first weekend in September, several airlines raised business fares 5%. That Sunday night, hovever, United instructed ATPCO to roll back the increase in markets where it competes with Southwest Airlines, which hadn't matched the increase in all United markets, major carriers like American immediately followed suit. Early Monday morning, United reinstituted the 5% increase in its non-Southwest markets. Within 24 hours, other major carriers had done the same.
"It certainly looks like they have a way of getting everybody to do the same thing," says Pitts Carr, an Atlanta attorney who sued carriers for anticompetitive pricing practices in 1992. (He negotiated a settlement with the airlines.)
Airlines argue that if they were gouging customers and colluding on prices, they would be earning more money.
Despite the hefty earnings of the past three years, which are expected to total $13.9 billion by the end of 1997,
airline profit margins are still relatively skinny, and credit ratings for some major carriers remain below investment-
grade.
[A consequence of the industry's requirements for extremely expensive capital expenses, jet liners & aviation fuel,
and highest quality of all three labor branches: operators (pilots), service (aviation mechanics) and customer
service (familiarity with highly complex and large schedules & face-to-face contact in high dollar transactions
purchased in a hurry) - ed.]
In the third quarter, American posted its highest pretax profit margin ever in its history, but it was only 10.1%.
"We're jsut now approaching the average returns for most industries in this country," says Gerard Arpey,
American's chief financial officer.
Still in an industry with a cutthroat reputation, some carriers seem downright shy about head-to-head competition. Trans World Airlines, for instance, has taken to offering discount coupons through Kroger grocery stores. And some travel agents have found that airlines will give them special deals, but only over the telephone and onlu if they think competitors won't find out. " As long as it doesn't provoke a response, they'll do it to keep my business", says Seattle travel agent Steve Danichek, who says he recently persuaded US Airways to knock $1400 each off the price of some Seattle-to-Baltimore tickets.
Such machinations are tough to stomach for salesman Gerald Davis. To save almost $1000 over the cost of a
direct flight from Dallas, he recently went through Washington to get to New York. "They've made it a game that
gets very irritating", he says. "I feel violated every time I get on a plane."
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