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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Preface

Summary

1 Introduction

Backgrounds

TUI Nederland and TUI Belgium, part of TUI Benelux, are leader in tour operating and constantly innovating. With automated yielding in aviation and automated yielding in the hotel industry, automated yielding in tour operating was the next step. Until 6 years ago, this was done manually and based on experience. This was not efficient, because only a small amount of prices could be changed. Therefore, TUI Nederland came with a solution: Project Yield.

Project Yield was founded in 2011 with the objective to develop a tool that will automatically process and import day-to-day information about the package travel prices to improve margin and sales. Because package travel consists of several items, usually flight and accommodation, there is a wide variety of daily prices. Project Yield helps to support the Yield department and Capacity & Traffic department to promote the margin result. This support takes place on both data as on model level.

Project Yield's core activity is to carry out analysis, building models, presenting results and applying these in different company processes. These activities consists of achieving the highest possible load factor and revenue on flights. Project Yield also supplies departments with sales, capacity, stock and margin information, advising on the distribution of product stock and on possible additional purchases of capacity.

This assignment is set up to determine the demands, identify the difficulties and try to solve the problems for an automated yield management system in Belgium. Because, with the prospect of a new reservation system, both TUI Nederland and TUI Belgium must change their way of working. Therefore, TUI Belgium can benefit from the changes that are required for TUI Nederland. The findings and results will be directed to TUI in a recommendation.

Problem definition

Research design

Research report

2 Traditional yield management

2.1 The birth of yield management

What is yield management? - Yield management is the process of making frequent adjustments in the price of a product in response to certain market factors, such as demand or competition. (Oxford Dictionary of English)

After decades of stability, the adoption of the 1978 Airline Deregulation Act caused a radical change in pricing, operations, and competition. Two major changes took place. First, a wide variety of discount fares was introduced due to increased competition. Second, airlines were allowed more flexibility in scheduling. So, to serve more markets, airlines let go the principles of point-to-point network and developed hub-and-spoke networks. This resulted in a complex airline environment with many different passenger itineraries, all with different fares. (Aviation Week, 1978)

The best example who knew how to embrace this new environment is American Airlines and how they not only survived but thrived in the competition-fierce deregulated airline industry of the last thirty years. American created and developed a business practice that not only saved many companies from financial crash and burn - including their own - but has been adopted by most inventory-based, data-dependent companies ever since. (Peacock, 1995)

Yield management strategies were soon not only adopted in the airline industry, but also in various other industries where “perishable” inventory was a concern. Yield management is very well suited for service firms. Since tour operating is a service, few characteristics that make yield management efficient will be reviewed. (Guillet, 2015)

2.2 Characteristics for effective yield management application

Yield management techniques apply when a firm is operating with relatively fixed capacity, when demand can be segmented into clearly identified sections, when inventory is perishable, when the product is sold in advance, when demand fluctuates and when marginal sales costs are low but marginal production costs are high. (Kimes, 1989)

Relatively fixed capacity

When demand peaks, many services face capacity constraints that prevent servicing additional customers. (Shugan, 1993) Airlines cannot enlarge capacity of an aircraft by adding or removing seats at will. The same goes for hotels: an extra room cannot be easily added onto the property. If they could, there would be no reason to try to manage capacity.

Segmentation of markets

A service business must segment its market into different types of customers to smoothen the distribution of customers. (Voneche, 2005) The basic idea is applying different marketing plans for different customers (Figure 1). A good example is a business traveller who is willing to pay more in exchange for flexibility (price-insensitive), against a pleasure traveller who will book at a lower fare a certain length of time ahead (price-sensitive). This strategy allows service providers to fill otherwise lost inventory.

Figure 1: Different markets: single room rate vs. multiple room rates

Perishable inventory

When aircraft depart or vacant hotels rooms occur, inventory is lost forever and therefore perishable. (Parasuraman, 1988) Once the aircraft leaves the gate with empty seats, inventory cannot be stored and is lost. It's the same for vacant hotel rooms, if not sold one night, that room-night is lost. Yield management can minimize the inventory spoilage.

Product sold in advance

If everything was sold at once, there would just be a fixed figure and a firm cannot take advantage of customer behaviour. (Voneche, 2005) In the service sector a trade-off must be made between early reservations or wait for higher-paying customers. But would a higher-paying customer appear? How many super-saver discounts should be sold? Might someone pay more for the same product? With the right yield management system, these types of questions can be answered.

Time-variable demand

Customer demand varies by season, by week, by day and by time of day. (Anthony Ingold, 2007) Managers must be able to forecast when demand peaks for extra revenue or decrease prices in low seasons. Historical data will offer a way to forecast peak and low season. Yield management tools can be used to smooth the demand fluctuations based on historical data.

Low marginal sales costs

Once a product such as hotel room or aircraft seat is sold, it does not cost much to sell another room or seat. (Kimes, 1989) Marginal cost is the cost of selling one extra bed night or seat and these costs will be low because for example the staff is already in place.

High marginal production

For yield management to work optimally, additional capacity must be expensive to produce. (Kimes, 1989) For example, a hotel is full and a customer wants a room, an extra room cannot be added easily. And again, it is the same for the deployment of an extra aircraft, it is a very high fixed cost.

2.3 The yield management problem

Inventory control of service business is based on understanding, anticipating and influencing customer behaviour in order to maximize revenue from a fixed time-limited resource. (Netessine, 2002) Because this decision-making process is extremely complex, control of inventory can be done only with automated systems and models. To solve this yield management problem would require 250 million decision variable, consisting of passenger demand, cancellations and other customer behaviour. This problem is divided into three major functions: overbooking, discount allocation and traffic management. (Barry C. Smith, 1992)

Overbooking

To avoid unused capacity or lost inventory, airlines started to overbook flights and hotels to overbook rooms, attempting to offset the customer cancellations and no-shows. Thus, overbooking tries to minimise spoiled inventory. But the risk is that more customers show up than there are seats or rooms available. So yield management controls overbooking to the point at which the benefit of allowing an extra reservation is negated by the marginal cost of an over-sale. (Pfeifer, 1992)

Discount allocation

When discount fares were first offered, airlines had to decide whether or not to accept a discount fare. (Belobaba, 1987) If accepted, the discount price is the revenue for the airline. Rejecting the discount fare may result in an empty seat and therefore loss of revenue. On the other hand, rejecting the discount fare and therefore reserving the seat for a full fare, might result in additional revenue. This can be illustrated using a decision tree (Figure 2).  The rejection is determined by three factors: future expected demand, the accuracy of the demand forecast and the sell-up probability. Note the analogy with vacant hotel rooms.

Traffic management

As mentioned before, with the Deregulation Act airlines adopted the hub-and-spoke concept to serve more markets, which resulted in more complicated yield management problems. (Barry C. Smith, 1992) With a hub-and-spoke network (Figure 3), large number of passengers connect at a hub airport to reach their final destination. Theoretically a flight might have as many different revenue levels as there were sold seats because of different markets. So inventory control by fare class alone is not enough, because full fare is more valuable than discount fare in one case but less valuable in the other.

Figure 3: Example of hub-and-spoke network

To simplify the management of the fares, a methodology called nesting clustered market/fare combinations into a small number of similarly priced groups called buckets. (Aviation Strategy, 1998) Nesting reduces the inventory controls to a manageable amount. A market/class fare is available for sale only if the bucket has seats available. So this means that if a passenger wants to go discount from Portland to Miami, both the Portland to Dallas/Fort Worth flight as well as the Dallas/Fort Worth to Miami flight must have seats available. (Figure 4) Nesting requires complex yield management systems.

Figure 4: The control of market/fare classes into buckets

3 Characteristics of TUI Benelux as an tour operator

3.1 tour operating in general

Tour operator: a travel agent specializing in package vacations. (Oxford Dictionary of English)

In today's highly unpredictable and competitive business environment, tour operators might have difficulties to survive. Tour operators have besides competition in their own field, also competition of airlines and hotels. Most packages consist of two basic elements, flight and hotel, so customers can also book them separately themselves. In order to offer prices in which a tour operator can survive, proper yield management tools might be suitable. Yielding will help to create margin with the use of information systems and pricing strategies. Also offering new products as a tour operator will help to be successful.

3.2 TUI Benelux

3.2.1 Own Airline

In this paragraph there will be explained why TUI would have its own aircraft and why the aircraft distribution between TUI Nederland and TUI Belgium might look odd compared to the population of both countries.

TUI Benelux has its own fleet of aircraft to optimize company margin. TUI Nederland (TUI NL) has a fleet of nine aircraft and TUI Belgium (TUI BE) has twenty-four aircraft.  (Table 1 ) The reason TUI has a own fleet will optimize margin is as follows: the chain of distribution is completely controlled by TUI. (Figure XX) The chain of distribution is the means of getting the product to the consumer. To scale the operation up, TUI is able to spread its costs over their services.

TUI Nederland TUI Belgium

Embraer 190 - 3

Boeing 737 5 19

Boeing 767 1 1

Boeing 787 3 1

Total: 9 24

Table 1: Fleet distribution of TUI Benelux

versus

Figure XX: Traditional chain of distribution in tour operating compared to TUI's  chain of distribution

The primary reason for this fleet distribution is the different source market TUI BE operates on, namely five airports: Brussels, Antwerp, Charleroi, Liège and Ostend. Compared to the one airport TUI NL operates from: Amsterdam. To adapt to the demand TUI BE focuses their supply on flexibility of the fleet instead of high volume capacity. In other words it is easier and more convenient for the customer to offer 112 seats and fly twice a day than to offer 300 seats at once.  As it may seem off topic to show the fleet distribution when doing research about yield management, this explanation will help to understand problems that may be encountered later on.

3.2.2 markets

The products that are offered by TUI Benelux are the same, due to different source markets the division of the products are not. To focus on the two most important and best sold products, the distribution over each airport will be discussed. This will be used later on to assess the outcome.

Package holiday

The traditional product TUI offers are package deals.

Seat Only

Controlling the whole chain of distribution, might have some more risk. A tour operator without a fleet, need to sell a fixed number of seats, according to the agreement with the airline. All the extra seats are extra margin. Tour operators with their own fleet basically need a 100% load factor, which is virtually impossible with only package holidays. So to sell seats that else would be lost at the moment of departure, TUI came up with the product Seat Only. It will sell only tickets to customers, this means a hotel is not included. With this new product, markets started to changed. Where at some market 70% package was sold, at other markets 70% was sold as SO.

3.3 Characteristics

Capacity constraint

When having you're your own airline and you offer several hotels at one destination,

Overbooking

Since TUI is a tour operator, and people pay more money compared to regular tickets, the no show rate is pretty low. Therefore the principle of overbooking is not applied on such a big scale as it is in the rest of the aviation industry.

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