Wednesday, October 31, 2007

Yield (Revenue) Management classes..

Revenue Management / Yield management is a new area which has been perfected by the application of revenue management principles in the airline industry, pioneered by South west airlines of US. Only twenty years old, it was very difficult to see teaching material and learning material. It was then I first noticed that Sunil Chopra and Peter Meindl in their book on Supply Chain management have covered a chapter on revenue management. They discuss the different models, perishable inventory, overbookings and the bulk and spot offers model, and explain how multiple customer segments price differentiated on the dimension of time can lead to realising greater profits.

Click here for a presentation pdf..

Basically dealing with increasing the revenue from business operations, especially when dealing with perishable inventory like hotel rooms and airline seats , it is the fine application of stochastic probability and econometric analysis to arrive at optimum booking limits and capacity allocation.

While taking this topic for the first time in XIME, it was interesting. I was also the first to introduces this concept in Goa Inst of Management in 2005 and after that nobody has caught up with it afterwords. The students have been feeling really good about it and the fact that practical cases can be discussed in the class with really interesting situations cropping up, with the right dose of Mathematics and probability, is making me feel really happy about it.

Here is a work experience session I have taken in the class. The questions are given here.

Revenue Management problems for working experience ( the cases have fictitious data because of confidentiality agreements, but reflect a broadly correct picture for education purposes)

1. Qantas operates from Melbourne to Hongkong on a daily basis it's A320 aircraft with 200 seats on board at $500 for a business class ticket and $ 230 for an Economy class ticket. Find out the capacity to be kept aside for the luxury traveller if this demand is normally distributed with a mean of 85 and a variance of 40 ( ~N(85,40)). Find the total revenue from this cost pattern for the airlines for each fully booked non-stop flight.

If the CEO decides to reduce the luxury class cost to $450, ( app same demand distribution as the $500 demand),calculate the capacity for each segment and the total revenue for a fully booked flight.

The CEO decides to introduce a deluxe class at $ 800, demand for which ~N(35,20), what is the revised capacity of the three segments ( the total seats are reduced to 170 to facilitate better comfort for the deluxe class passenger) and the resulting total revenue for a fully booked flight.

2. The postponements ( one postponement possible per passenger ticket) for the daily Air Deccan flight from Bangalore to Kochi ( ATR , max capacity of 100) on any week day is found to be N(12,10). The cost to the company for flying a passenger is Rs 500 while it charges Rs. 800/- (besides the airport tax of Rs 1400). Any overbooked customer showing up is accommodated on Indigo Air at Rs 3500/= (incl. airport tax of Rs.1400). Find the no. of tickets which need to be overbooked to ensure maximum revenue for Air Deccan.

On weekends the cancellations reduce and is ~ N(8,9). Find the opt. no of over bookings to be done on weekends by Air Deccan.

3. Hotel Leela Palace Kempinski, Bangalore, the No 1 Hotel in the world has total 250 rooms. There are 10 luxury suites kept aside for VVIPs each costing Rs 20000 per night. The economy rooms are priced at Rs 5000 per night while the business class rooms are available at rs 9000 per night. Find the no of rooms to be set aside for the economy customer and the business customer if the demand for business class is ~N(40,25).

The economy rooms were going vacant on some of the days and hotel GM decides to introduce a super economy class of rooms at Rs 3000 per night for the holiday traveller to maximise revenue. If the demand for the economy class at Rs 5000/= is ~N(105,22), find the new capacity segregation for the different customer segments in the hotel.




  1. Dear Mr George: Interesting to see this post. I handle Revenue Management at Air Deccan. Would be nice to be in touch. Best wishes,


  2. Wonderful blog & good post.Its really helpful for me, awaiting for more new post. Keep Blogging!

    Yield Management


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