What is yield?

[lumax]

I have talked to people that throw the word “yield” when discussing the economics of airlines. But when I ask them what “yield” means, I get a few mumbled words followed by “well, I really don’t know”.

What is yield as it relates to airline ticket prices?



Thanks

 

[Flywrite]

Explosive power of a nuclear device isnt it?

Or maybe its how much of the Revenue per Available Seat Mile (RASM) is profit, in other words RASM-CASM (Cost per Available Seat Mile).

An Availalbe Seat Mile is each mile flown per seat. A 100 seat aircraft flying 100 miles has 10,000 ASMs. If that flight costs $2000 then the CASM is $0.20. If the Revenue from the flight is $3,000 then the RASM is $0.30, meaning a yield of $0.10 per available seat mile.

I may be wrong on this explanation, if I am I'm sorry if I confused the issue more.

Pretty sure about the nuke thing though...

 

[atrdriver]

Think profit, but since that's a naught word they use yield...

 

[LarryinTN]

It's not profit, it is revenue per seat mile. i.e. Yield is still a positive number even if it is below cost.

Also, you don't typically talk about yield including the unsold seats. You talk about the yield considering only the seats that are occupied by revenue passengers as that separates it from your load factor. So, even if yields are good you could be losing money if load factors are low.

 

[Resume Writer]

Most people have explained the term yield on here. In basic terms, it is the amount of revenue generated by the seats available on the airplane. However, there is so much that goes into it.

There are complex math equations that go into calculating yield. But it starts with yield management or basically, inventory control. An airline (or hotel) has to look at historical booking trend data (year over year, same period), leisure traveler versus business traveler, no-shows, events that are/were happening in certain towns (for example, COMDEX in LAS sells out airline seats), empty seats flown and competitive pricing at other airlines.

Then they have to decide, based on the above data, what percentage of seats they will sell at a discounted price versus a full price. There about 10,000 fare changes per day in the airline industry. Yield management's job is to fill airplanes at a profit. They analyze the sale of seats on every flight they are responsible for and determine whether they should raise the price or lower the price.

If seats are not selling, or have not sold close to the departure date, you will often see inventory dumped into the system last minute at substantial savings.

Another important component in yield management is overbooking flights when there is a chance that a passenger will not show up. The airline does not want to fly an empty seat and lose revenue. So they overbook flights, once again based upon historical data, by a certain percentage, to ensure seats are filled. The problem happens when all the passengers show up. Then they have to bump people and pay some sort of compensation. Typical overbook rates are about 10-20%.

Yield management personnel are highly stressed individuals. It takes a special person to work in that department. If you work at an airline, I suggest going to visit that department and watch them in action.

Kathy

 

[username]

When you guys figure out what yeild is send a letter to airline management giving a detailed descriprtion of the concept.

 

[Publishers]

Resume Writer gave a good explanation. In the old days, it was common for seats to be sold at a discount farther out and then get higher priced as the time for the flight came.

Yield management -- and the second word is key here -- changed that thinking and allowed airlines to more closely manage fares to demand. Therefore only a certain amount of heavy discounted seats are there far out on popular routes. The fares adjust constantly, mostly through computer programs, as demand changes.

The idea is to maximize your "yield" on any particular segments by not locking in prices but letting demand match availability.

 

[Indypilot]

Think of it this way, Revenue gained by flying one seat, one mile.

For instance if the ticket price is $100 on a flight that is 400 miles, the yield is (100/400) or 25 cents. Or say $200 for 2000 miles = (200/2000) 10 cents.

Now using yield and LF one can come up with RASM (Revenue/Available Seat Miles). Let suppose 100 seats, Now if you charge everbody $100 for the 400 mile trip and fill 100% of your seats, your RASM is 25 cents. But we all know that doesn't happen.

So you can calculate RASM in a number ways. Say we have a LF of 75% and an average ticket cost of $100. The first way is to add up the revenue (75*100=$7500) and divide by the ASM's (100 seats * 400 Miles = 40000), so 7500/40000 = .1875. Or one can take the yield ($100 average ticket price/400 miles) .25 * by LF .75 = .1875

The basic concept behind yield is how much potential revenue exists on a flight or within the entire airline at their average ticket price. It is the number of cents or revenue you would make per seat mile if you were at 100% load factor. Now it is a lot more complicated than that once you get into revenue management, yield management ect. But that is the basic idea.

Keep in mind that you are using average ticket price. Now as LF increases in most cases, prices go up (fare bucket system, Walk up fares). So if you have a higher load factor, yield tends to increase. But for the calculation, you are using average ticket price paid by just the passengers that were on the plane. So it is actually very complicated to forcast yield on certain routes. There are many factors that can adjust yield so it is a very dynamic number

 

[Resume Writer]

Now as LF increases in most cases, prices go up (fare bucket system, Walk up fares). So if you have a higher load factor, yield tends to increase.

Not always true. You can have a very high load factor, but not make any money on the flight. That is where the break even load factor comes into play.

For example, when AWA had their fare sale (fire sale) in 1990, they had no capacity controls in place, so they were virtually giving away all the seats. The tickets were sold at 50% off. They reported loads at 75%, but after selling the tickets for 50% off, you have to cut that figure down. The break even load factor was about 60%, so they lost money on the deal. Consequently, they filed bankruptcy in June 1991, because that sale, coupled with other bad management decisions, sunk them.

As someone else said, there are so many factors that go into yield and revenue management. Very hard to predict what the yield is going to be on any given flight.

Kathy

 

[Indypilot]

"Now as LF increases in most cases", not all such as huge fare sales, dumping seats at the last minute, ect. If you are selling all of your seats at low prices, your yield is going to be low anyways. Now in most airlines systems, the fare buckets are structured to increase price as demand goes up, therefore higher yield as LF increases. Its all a function of ticket pricing and you are correct in that these systems are very complicated.

 

[AcroChik]

PowerPoint Presentation

For those of you with a mathematical inclination, here is a PowerPoint presentation that delves into the econometrics of loadfactors, yield management and some exotic mysteries of airline accounting (which in my opinion is very much like Hollywood accounting).

It takes a while to work through this presentation, but it does build to a logical conclusion.

http://www.ima.umn.edu/talks/workshops/11-11-15.2002/smith/smith.ppt

 

[Maktub]

Yield

I don't think that any of the above explanations accurately define what yield is. First start by defining a few terms of measurement:

ASM - 1 seat that flies 1 mile on a plane, regardless if that seat is occupied or not. So if we have a haul length of 100 miles and the plane has 100 seats, our ASMs are 10,000 (100*100)

RASM - Revenue per ASM. Total revenue on flight, say $50,000, divided by ASMs ($50,000/10,000) = $5 (unrealistic, but this is just an example).

Load Factor - % of seats occupied on the plane. If 85 passengers are on this plane, the load factor is 85%.

RPM - Revenue Passenger Miles, which is Load Factor*ASM. In this example it is .85*10,000 or 8,500.

Yield - Revenue divided by RPMs. So in this example, yield is $50,000/8,500 or $5.88

Average fare - Yield*length of haul. $5.88*100 or $588.

Yield is beneficial for airlines with different haul lenghts to look at over average fare because it factors in the length of haul. It gives a standard. A route with the same revenue and average fare but a longer length of haul will have a lower yeild.