Case Studies

DINAMO Yield Management at American Airlines has $1.4 Billion Impact

Barry C. Smith, John F. Leimkuhler, and Ross M. Darrow, (1992) “Yield Management at American Airlines,” Interfaces, 22:1 (8-31)

American Airlines pioneered the development of sophisticated reservation management systems. In 1968 American Airlines launched the SABRE computerized reservation system that linked all of the reservation agents around the country. This enabled the company to gather consistent and timely data about reservations. By 1968, American launched it first version (that has since been refined several times) of an automated overbooking process. Without overbooking, American estimates that 15% of the seats on sold out flights would be unused. This overbooking process was the first element in developing a yield management system.

Managing ticket sales increased in complexity when American introduced super saver discount fares in 1977 and when the airline industry's schedules and fare structure were deregulated in 1979. With these changes American Airlines moved to develop a yield management system with the goal of "selling the right seat to the right customer at the right time." The yield management system helps determine how many seats to allocate initially to each fare category and how to dynamically adjust this allocation as reservations come in and the date of the flight approaches. One key to maximizing an airline's revenue is to keep the right number seats available for the full-fare customer (often a business person) who makes reservations relatively close to the departure date.

De-regulation of the airline industry triggered a major restructuring of flight schedules that further complicated seat allocation. Under de-regulation the airlines moved to develop a hub and spoke system that often had passengers flying into a hub on their way to their final destination. As a result, the yield management system must take into account that some seats on flights between cities must be reserved for connecting flights. An important building block is the forecasting model that estimates demand and cancellation rates.

The complexity of the problem eventually led to the development in 1988 of an automated system for yield management, DINAMO. The system's net impact was estimated be $1.4 billion in additional revenues over a three year period. It also increased the productivity per analyst by 30%. Lastly, the system enabled American Airlines to evaluate the potential of Ultimate Super Saver fares that were priced so low that they could stimulate additional traffic.


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