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
 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
Continue….
 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
 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
•
•
•
 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
ü Fare Structure
ü 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.
ü Length of haul: fares per mile are generally
lower for long haul than short haul routes
üLevel of Competition
üthe more monopoly power a carrier
benefits from
üthe stronger in general its yields
üNetwork Design
• Freight Yield
üBuying power of forwarders
üdirectionality 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 air­craft
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
 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
Continue…..
• Production and consumption of the
service can only occur simultaneously.
• Front-line personnel in direct contact
with consumers can have a pro­found
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
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 none­theless
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
 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 Price of Total
• Sold Product 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 Price (Rs.) TR (Rs) MR (Rs) AR (Rs)
1(Units) 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 Method
Price (Rs.) Quantity TR AR MR
10 Demanded
1 10 10 10
9 (Units)
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
üMonopoly Market
üelasticity of demand is different in
the two markets
üthe 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:
ü the no. of firms is large, but it is not as
large as in perfect competition.
ü Goods are similar but not
homogeneous.
ü Entry and exit is easy and there are no
significant barriers.
ü 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:
ü Difficulties in oligopoly forms,
Differentiated and Undifferentiated,
Collusive and Non collusive
Oligopoly/cooperative and non
cooperative.
ü Uncertainty in behavior
ü Mutual interdependence amongst
different firms.(Price Rigidity and
Kinked Demand Curve)
ü Non- Price Competition is more
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
signif­icantly above competitive levels (i.e.,
significantly above marginal cost), market
demand must be relatively inelastic.
• Cartels are illegal in many developed
commercial jurisdictions, al­though some
might be explicitly permitted under the
terms of a specific exemption to otherwise
 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 in­creasing 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 chall­enges be overcome in
the long run.
Continue…
• Collusion :Less formal than a cartel,
collusive strategies involve air­lines 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 co­ordinated 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
Continue…
• 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