A fantastic explanation of inventory and revenue management by American Airlines

American Airlines released a video today in which they explain how airline pricing works. It can be found here:

That’s truly one of the most brief yet useful explanations I’ve seen from someone in the industry. Well, minus the first sentence about the airline industry “being unlike any other industry, because [they’re] selling a perishable item.”

Comments

  1. I wish they would have gone a bit deeper, but then again… I worked in the same department at United, so I’m a bit jaded. šŸ˜‰

    Still not a bad high-level summary.

  2. Wow, so 2 out of 3 AA revenue managers are, what, 19 years old?

    More seriously, with the 24 hr booking hold, what’s to prevent a customer from waiting for the fare to drop for longer than 24 hr? That is, come back in 24 hr, and if the price hasn’t changed, just cancel and book a new hold, then rinse/repeat until the fare goes up?

  3. I’d say inventory plays a bigger role than pricing…interesting to see they opened the black box a little bit. šŸ™‚

  4. @ snic — ROFLMAO! Hey, it’s either that or regional jet pilot. šŸ˜‰

    The “abuse” you point out is probably why most airlines have eliminated free holds.

  5. This video implies that there is a lot of human interaction with the pricing system. I have to believe that this is much more like Wall Street where complex algorithms do the majority of the work with humans occasionally tweaking the formulas – and then only after much analysis.
    It would be interesting to know what these analysts have as a background, economics, finance, or computers?

  6. I wonder which airline charges your card if you hold a res and do not cancel it?
    Good info.

  7. Here’s what they really meant to say:

    The airline industry is a monkey see, monkey do. If one airline drops their fares, we have to follow, and it really iritates us. If we raise fares, we hope other airlines will follow, otherwise we have to lower our fares.

    And the reality is, fares are only part of the equation. In the past few years, we’ve taken everything that people have come to expect when they book a ticket, and charge you for it. Want to check a bag, $25. Want an aisle seat, pony up. Heck, we’d love to charge you for the lavatory, but the FAA won’t let us. We like to tell you that this will keep fares low, but the reality is, we will push fares as high as we can, and continue to find more and more things to charge you, our valued customers for.

  8. @Sunshine – To be fair those other airlines don’t call it a hold (e.g. AA/US), but a 24 hour refund policy (e.g. UA/DL/WN/VX),

  9. “There’s a lot of transparency in our industry”. Ok Rev Man – tell us how YQ works

  10. @oleg – I believe all US airlines have to offer the 24 hour refund policy because of a law that came into effect in January.

  11. Back in the mid 1990’s, when automation of yield management was relatively new, AA lost about $50 million dollars in revenue when a software developer made an error causing AA to stop selling cheap seats too soon. I think that’s what they call a “career limiting move”. šŸ™‚

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