YIELD

TRAFFIC x YIELD> < OUTPUT x UNIT COST= OPERATING PERFORMANCE (i.e., PROFIT or LOSS).•Yield - revenue earned per RPM or RPK or per RTM or RTK - is the element of the operating performance model.

Price defined

• Monetary cost to customers.• High nonmonetary costs are better treated as

low-quality service attributes; in this sense, a multi-stop or connecting service' costs' more time than a nonstop service and so compares unfavorably on this attribute dimension.

Different Perspectives on the Role of Price

• Price is a mechanism for bringing supply and demand into balance at a particular level of output

• Price - in the form of yield - is one of four elements in what is usually an unbalanced equation, the balancing item being operating profit or loss.

• To a marketer, price is part of a marketing mix along with service design, service personnel and delivery processes, distribution channels, and the marketing communications mix (i.e., advertising, promotion, public relations, etc.)

Responsibility for Pricing

• The purpose of a pricing department is to create and administer the passenger fare and freight rate structures applicable to each market.

• The function of revenue management departments is to allocate the physical space available on each individual flight-leg (augmented by overbooking limits) between the different fare and rate bases available for sale on that leg.

• The fundamental objective of the pricing function is to design a tariff structure for each market that maximizes revenue earned from price inelastic segments of demand, stimulates demand from price-elastic segments to fill space.

Influence of Pricing

• Influence on demand• Price is one of the most important determinants of demand• An elasticity associated with price• Other important independent variables in the demand function• Prices influence both traffic generated and the yield earned from

that traffic.• Airline managers to be able to use price as an effective demand

management tool• Shape and slope of the demand curves faced by their services at

different points in time (e.g., off-peak and peak, or weekdays and weekends, or morning, midday, and late afternoon/early evening).

• Different segments of the market and demand.• Different airline markets and demand curves

Influence on supply and costs

• By influencing demand, price drives revenue. The volume and nature of demand an airline chooses to supply with output in turn drives costs.

• For example, by offering a tiered fare structure in response to the price elasticities of people willing to travel only on discounted fares, an airline is not just striving to maximize its own revenues but is also increasing the density of traffic in the markets concerned.

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Effect of increased density on cost

Traffic Cost

Variable Cost

Fixed Cost

Unit Cost

Capacity Cost

Increase in Capacity cost

May remain unchanged

Output, capacity and Traffic Cost

• Output generation imposes Capacity Cost• When airlines sell the output, they carry traffic which

imposes traffic costs such as distribution, handling, catering and so on.

• Traffic cost are generally small to capacity cost.• Variable cost increase or decrease in response to

changes in the volume of output produced or sold.• Fixed costs are an allocation of a share of the costs

incurred in acquiring and sustaining fixed assets.

Influence on Profits, Market Share, and Cash Flow

• Strategy intended to maximize revenue.• Pricing policy with regard to revenue,

profitability, market share, and cash flow should be driven by wider corporate and marketing objectives.

Pricing and Market Segmentation

• Uniform Pricing• Discriminatory Pricing

Price differentiations between segments of demand, augmented by price discrimination with in segements

• Yield is an average of revenue earned per unit of output sold.

• High yield passengers• Low yield passengers• High yield traffic is vulnerable specially in case of

downward secular trend.• Low yield traffic contributes unseen value to high

yield traffic.• It may add density to a route.• Corporate overhead can be spread over larger

output.

Recent Yield Trends

• Price sensitive leisure travel is growing much more rapidly than business travel.

• Long-haul journeys, which are generally lower yielding than short – haul trips, are growing as a proportion of total journeys

• Real unit cost have in many cases been declining more slowly than yields.

Factors Influencing Yield

• Passenger Yields Fare Structure Traffic Mix: Demand characteristics, effectiveness of the

carrier’s RMS in protecting space on high demand flights for late booking, high-yield passengers, the effectiveness of conditions imposed within the tariff structure to prevent the diversion of passengers from market segments with less elastic demand characteristics to products designed for the more price elastic segment being targeted by discounted fares.

Length of haul: fares per mile are generally lower for long haul than short haul routes because unit costs taper as stage length increases

Level of Competition the more monopoly power a carrier benefits

from the stronger in general its yields Network Design• Freight Yield Buying power of forwarders directionality of freight flows

Output

• The output produced by an airline is measured by multiplying a unit of seating or payload capacity by distance flown.

• Capacity refers to fleet’s potential output• Output refers to ASM, ATK etc. actually supplied to

the market.• The capacity of any given type of air craft to produce

ASMs (or A TMs) per day or per year will depend to a considerable extent upon the nature of the airline operating system within which it is deployed.

Capacity of an aircraft will depend upon• Average stage-length - because, other things being

equal, longer stage lengths generally permit more output to be produced in a given time by a given type;

• Nature of the airline's product - because, other things being equal, a full-service product requires longer transit and turnaround times bet ween flight-legs than a 'no-frills' product;

• Network design - because it is generally impossible to extract as much utilization from a given type operating within a hub-and-spoke network as from the same type flying similar stage-lengths on a point-to-point basis.

Economics of supply

• Supply function• Supply schedule • Supply curve • Change in quantity supplied• Elasticity of supply

Supply-side Characteristics of Airline Service

• An airplane might depart with some empty seats there is not necessarily an oversupply problem.

• Additional frequencies improve choice of departure time

• Unsold output is lost at the point of production because it cannot be inventoried

• The more service concepts an airline has in its portfolio, the more heterogeneous its output

• Different packages have different production costs.

Continue…..• Production and consumption of the service can

only occur simultaneously.• Front-line personnel in direct contact with

consumers can have a pro found impact on the quality of service delivered, but often have little influence over the design of that service.

• As well as being people-intensive, airline service is also equipment intensive and information-intensive, with the result that service delivery depends heavily on the effective management of both people and technology.

Market Structure and Competition

• The numbers of buyers and sellers, and their respective power

• Ease of market entry, mobility, and exit• The extent of product differentiation or

distinctiveness• The availability and cost of information

• Regardless of market structure, a profit-maximising firm should none theless select the output at which the difference between total revenue and total cost is greatest. This is found where marginal revenue (MR) is equal to marginal cost (MC). If MR exceeds MC, profit can be increased by selling more and to achieve this price should be lowered; if MR is less than MC, profit can be increased by selling less and to achieve this price should be raised; if MR and MC are equal, profit cannot be increased by raising or lowering output and so both output and price are optimal. In perfectly competitive markets P, MR, and MC are equal.

Different Types of Market

• Perfect Competition Market• Monopolistic Competition • Oligopoly• Monopoly

Perfect Competition market characteristics

• Large number of buyers and sellers• Homogeneity of product• Free entry and exit in the market• Perfect knowledge of the market• No discrimination

Firm’s Equilibrium Under Perfect Competition

• Firm’s Equilibrium by Total Cost and Total Revenue Method

Quantity Sold Price of Product

Total Revenue

1 10 10

2 10 20

3 10 30

4 10 40

5 10 50

6 10 60

7 10 70

8 10 80

9 10 90

10 10 100

Firm’s Equilibrium by Marginal Revenue and Marginal Cost Method under Perfect Competition

Output (Units) Price (Rs.) TR (Rs) MR (Rs) AR (Rs)

1 10 10 10 10

2 10 20 10 10

3 10 30 10 10

4 10 40 10 10

5 10 50 10 10

6 10 60 10 10

7 10 70 10 10

8 10 80 10 10

9 10 90 10 10

10 10 100 10 10

Monopoly Market

• When there is only one seller in the market• The distinction between firm and market

disappears• Railways is an example of a monopoly market

in India

TR and TC MethodPrice (Rs.) Quantity

Demanded (Units)

TR AR MR

10 1 10 10 10

9 2 18 9 8

8 3 24 8 6

7 4 28 7 4

6 5 30 6 2

5 6 30 5 0

4 7 28 4 -2

3 8 24 3 -4

Monopoly Firm’s By Marginal Method

• MC, AC, MR and AR curves are used• AR curve will lie on the demand curve of the

firm • The conditions for firm’s equilibrium:• MR = MC• MC must cut MR from below of it.

Price Discrimination in Monopoly• It is a situation where a seller charges different

prices from different customers for the same product.

• It is possible Monopoly Market elasticity of demand is different in the two

markets the commodity or service being sold is not

transferable between persons and markets.

Monopolistic Market• Monopolistic competition is that market in which

firms compete with each other but it is not like a perfectly competitive market.

• Characteristics: the no. of firms is large, but it is not as large as in

perfect competition. Goods are similar but not homogeneous.Entry and exit is easy and there are no significant

barriers.Price is not the only basis of competition between

different sellers.

Pricing Policy in Practice• Mark-up Pricing• Marginal Cost Pricing• Going Rate Pricing• Penetration Pricing/ Predatory Pricing• Skimming Pricing • Limit Pricing: it is adopted to prevent the entry of other

firms by existing producers in the market.• Discriminatory Pricing• Differential Pricing• Product line Pricing• Psychological Pricing• Two Part Pricing

Oligopoly Market• It is a market form in which the number of sellers is

quite few and they are affected by the behavior of each other.

• Characteristics:Difficulties in oligopoly forms, Differentiated and

Undifferentiated, Collusive and Non collusive Oligopoly/cooperative and non cooperative.

Uncertainty in behavior Mutual interdependence amongst different firms.(Price

Rigidity and Kinked Demand Curve)Non- Price Competition is more prominent than price

competition

Co-operative oligopolistic behavior • The objective of acting together is to maintain prices at a level

that maximizes the aggregate profits of all producers by simulating the behavior of a monopolist.

• Three broad categories of co-operative strategy can be identified: cartelization; collusion; and strategic alliances.

• Cartels exist where producers formally and openly agree on pricing and/or output levels.

• For a cartel to be successful in driving prices signifi cantly above competitive levels (i.e., significantly above marginal cost), market demand must be relatively inelastic.

• Cartels are illegal in many developed commercial jurisdictions, al though some might be explicitly permitted under the terms of a specific exemption to otherwise applicable antitrust/competition laws.

Cartels face two significant challenges

• First, getting initial agreement from members perhaps having different cost structures, market projections, and strategic objectives is not necessarily easy;

• Second, the temptation to 'cheat' by lowering price or in creasing output to gain market share is ever-present. Only if potential gains from coming together to exert monopoly power unavailable to a member acting individually are sufficiently attractive will the chall enges be overcome in the long run.

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• Collusion :Less formal than a cartel, collusive strategies involve air lines co-operating on output and/or pricing decisions.

• Collusion might be explicit or tacit. • explicit collusion through open communications is still

prevalent in many markets.• Tacit collusion exists where output and/or pricing decisions

are co ordinated other than through direct communication.• the usual means is through forms of signalling• Another form of tacit collusion is parallel conduct• Price leadership - the practice of firms following the price

of a tacitly recognized 'leader' - is a particularly common feature of oligopolistic markets

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• Tacit collusion is often a fragile strategy in the long term.

• Any market accessible by a competitor prepared to exploit differentiation or costs advantages will in all likelihood eventually attract just such a competitor.

Strategic alliances • This type of co-operative strategy exists when

firms explicitly and formally collaborate. Their purposes could include collusion on pricing and output decisions where this is legal, but are usually much broader - covering a range of initiatives on both the cost and revenue sides of partners' income statements.

Operating strategy: the link between competitive strategy and industry economics