THE YIELD MANAGEMENT IN THE MOROCCAN AIRLINE

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1 THE YIELD MANAGEMENT IN THE MOROCCAN AIRLINE Salma BELGNAOUI PhD student Faculty of Economic Sciences Souissi University Mohammed V Souissi, Rabat. [email protected] Abdellatif CHAKOR Professor authority Faculty of Economic Sciences Souissi University Mohammed V Souissi, Rabat. ABSTRACT The Yield management is a management method whose technique allows to maximize sales and also to calculate in real time, the best prices to maximize the profit generated by the sale of certain perishable goods. This research aims to measure the efficiency of yield management within the Moroccan airline Royal Air Maroc and explore the application of yield management that can both optimize theft revenues through overbooking management and pricing elasticity, while responding to proximity marketing where customers want to be known. Keywords: Yield Management, Moroccan Airline, Air transport sector INTRODUCTION Companies try generally to reduce the sensibility of their clients to the price by valuing the perceived benefit. But in a competitive environment where the customer is more aware, demanding and informed than ever and has more tools to compare different offers on the market, companies have been forced to renew their marketing approach. The real-time pricing, whose philosophy can be summarized as "selling the right product to the right customer at the right time and at the right price," fits perfectly in the prospect of increased differentiation of the offer, in terms of specific needs of each consumer and corporate capabilities. This pricing principle marks a significant break from the traditional management of the mix. Indeed, for fear of the reactions of competitors, companies were often reluctant to use the variable price as the first means of differentiation. With Yield Management, it becomes a competitive weapon commonly used. On the etymological point of view, "Yield" means productivity. However, Yield management is a management approach whose technique allows firstly optimizing sales and secondly to calculate in the real time the best price to maximize the profit generated by the sale of - perishable goods - on the basis of modelling and forecasting of demand behaviour by market segment. The origin of the yield management back to Robert Crandall, CEO of the company "American Airlines" in the early 1980s, during a meeting wondered "Why should American Airlines operate charter flights while its scheduled flights are half empty? What about considering the half-empty aircraft as a charter? ". The idea was not to segment the aircraft classes of additional services, but greatly reduce the price of some seats. The challenge is to achieve these seats sell to price-sensitive travellers, while selling the largest possible number of seats at high prices to people who travel regardless of the price. The concept of tariff classes was born. Customers in general did their forecasts for their holidays several weeks in advance, while business travellers choose their flights at the last time. Vacationers go for a week or more on their destination, while business travellers rarely do. Therefore, we could ask the price-sensitive customers to buy their tickets cheaper if they book weeks in advance. But, how could the company determine the number of seats to sale in advance at a discount? If it sells, it risked losing business travellers who can later pay a better price. But if it closes too early sale of discounted tickets, aircraft will continue to leave with empty seats. 52

2 Refine the estimates could increase the profit of several million, but required computational power unimaginable at the time. However, rudimentary rules were enough until the establishment of precise calculations. The Yield management is clearly a scientific method of calculating prices which revolutionized air transport in the early 80s. It can solve optimally the problem of interaction of supply and demand, with tiered pricing and systematic control of the quantity of a product sold in each fare class. The consequences of the use of this method are felt by all stakeholders: producers and consumers. Since the deregulation of the air traffic, this method gets more attention. In fact, airlines have faced a new highly competitive environment characterized by electronic distribution systems and market entry of low-cost carriers. Yield management has been the main tactical weapon that large companies used to maintain their market share without damaging their profitability. Those implemented yield management systems were best suited to the new competitive environment. From the 1990s, Yield management who was consecrated in the airline industry enters other sectors tourism, the financial sector, communication, ICT sector...etc. first in the United States and than in Europe and the rest of the world. In an unstable business environment where competitiveness has become synonymous of the viability for businesses, Yield management faced the cost of its production. Now, optimizing sales of perishable products cannot continually stimulate the market demand, but to control it. Companies are required to be reactive and therefore be able to anticipate future situations. In an airline, this means a projection of the potential demand on capacity management of a flight in order to reduce the amount of unsold seats. Minimize unsold is to assume a constant risk-taking linked to the management of overbooking and therefore take a responsibility of transferring a client on another flight. The issue of improvement in unit revenue of a seat can be explained by the following two points: - If too many seats are offered at high prices, the demand for reduced rates will be isolated and the flight risk to leave with empty seats. - However, if you offer too many seats at a reduced rate, the flight will leave full but the recipe is low due to the loss of the most profitable application. On one hand, managers flights decide either to sell a seat immediately at a reduced price to avoid it remains empty during takeoff or to take the risk of waiting for a customer willing to pay full price. On the other hand, the principle of elasticity of rates must broaden the customer base and maximize revenues of the facility without getting lost in an unmanageable confusion discrediting its sales policy. Because of the multiplicity and complexity of this system, it is necessary to consider the application of yield management that can both optimize revenue flight through overbooking management and tariff elasticity, while responding to proximity marketing where customers want to be known. Since the concept of yield management is born in U.S. airlines and its success led to its spread in all countries and in several areas. This research work while still in the air transport sector take as object of study the Moroccan market, and the case of the airline Royal Air Morocco. This study aims to measure the efficiency of yield management in this airline. In addition, this research is of particular interest, especially in a time when the Royal Air Morocco faces competition increasingly fierce and financial difficulties that threaten its viability on the market and require a restructuring plan recently introduced. For the purpose of answering this question, we will discuss in the first part the liberalization of air transport, in the second part the analysis of flights Yield Management and finally we will focus on yield management system within the Royal Air Morocco. I. The air transport sector Traditionally the air transport market was governed by bilateral agreements which set the airlines, capacity and frequency between countries. Rates depended on the distance travelled and were almost identical from one company to another. This allowed very little competition and favoured a transactional marketing in which exchanges were organized with customers in a timely manner. 53

3 In such a context, airlines can only focus on increasing sales volume and consequently their market share at the expense sometimes of customer satisfaction. The valued approach is to maximize efforts to find new customers. In limited competitive field, the only concern for the airline is searching for short-term profitability The deregulation of air transport The liberalization of air transport began in the United States on 1978, due to the disappearance of the rationale behind the regulation of It began to be scepticism regarding economies of scale in the sector. However, the air transport activity had become safer being managed by large companies and receiving fewer subsidies. In addition, there was a total absence of price competition. All this increased the pressure to liberalize the sector. After a transitional period, the air traffic became completely free. Two decades later, this liberalization spread in Europe, and was not actually achieved until In Morocco it was effective in 2006, after the signing of the agreement in 2005 to liberalize the sky between Morocco and the European Union The consequences of the liberalization of air transport The airline is one of the most complex, most constraints company it is possible to imagine. The high-risk nature of the airline industry tends to discourage entry. Because airlines companies have high fixed costs in relation to turnover, a small change in load factors or price levels may have a significant impact on profits. The industry is very vulnerable to an economic downturn. In addition, competition occurred with deregulation, trade patterns shook peaceful and undermined the pricing of the comfortable time when the air transport was a luxury for the elite money. Profits become random, the balance between quality of service and cost control more difficult to achieve, even though the growth in the volume of activity and the nature of corporate cultures was upset. However, over the last decade, transport liberalization allowed an anarchic occupation frantic lines and slots, with many airline bankruptcies. This boosted air traffic, increasing the number of passengers and aircraft movements, which results some traffic congestion. The airline industry seems to be cyclical and this inevitably affects its growth rate from year to year. However, the underlying trend was a decline, but a demand still has a good growth. In general, businesses that face continued growth and strong demand for their products or services would be pilgrim substantial profits. But airlines are exceptions to this rule. This is the real paradox of international aviation. The financial performance of airlines in the world as a whole has been very marginal, even in the years when the industry was highly regulated and largely protected from competition. The traditional measure of profitability, that is the rate of return on assets employed, cannot be applied to the airline industry as a whole. It is obvious that the growth was much faster in the 1950s and 1960s, when aviation was a new industry in comparison to the current situation of the sector that begins to show signs of maturity. But the rate of growth is still impressive. In conclusion, the air transport is changing quantitatively and qualitatively with the need to "rethink" generally. The liberalization of air transport had resulted in a disruption of companies, a breakdown of the tariff structure, improved service, increased productivity and lower costs, but also an evolution of networks including systems development Hubs and Spokes. In general, we can summarize the consequences of deregulation in three categories: First, organizational consequences for the aviation industry. Second, commercial consequences for the travellers and finally, economic consequences for companies. International air transport appears as a good example of the service economy that marks today's global economy. The airline market is developed as a market increasingly competitive, exceptionally sensitive to costs and unprofitable, but because of its recent democratization creates demand continually increasing. II. Analysis of Yield management flights 2.1. The interaction of yield management in the organization of an airline It is worth noting the terminological distinction between the yield management, which is a method of management applied to the flight s recipe that was followed and dated since its opening in sales and Revenue management including the entire fleet of the company and its network of flights operated to maximize overall revenue. 54

4 Service "Revenue Management" of a company is consistent with the variables of the marketing mix, without trying to stimulate demand but rather to channel it: The Revenue Management allows for an amount of seats not to sell more but to sell better. Yield Management function is related to three main elements, first there is the programming side, then there is the business management and finally the specialization and the development of distribution networks such as computer reservation systems. To understand the positioning of the yield in the overall management of flights which is the hub of an airline, we should explore it. Indeed, the flight planning is divided into several stages: first, the determination of slots, then determining the frequency depending on the route, the fleet assignment and the coordination with the hub. However, we must not forget that the goal of Yield Management, in addition to revenue optimization, is channelling a greater share of the potential demand. This approach corresponds to the competitive down price war. You can sell an identical product at a competitive price but specific to different customers, hence the importance of segmenting users to adapt a personalized pricing that allows the satisfaction of all. (Daudel Sylvain Georges Vialle 1989). At this level, segmentation techniques aimed at knowing the different profiles of the users of transport, their behaviour before and after the flight, their sensitivities to the constraints of tickets to offer a suitable product or customized with the objective of developing leisure customers while minimizing dilution of the business market: Segmentation in this case will be based on behavioural criteria such as time, ticket booking, time of payment and issuance, distribution channel, length of stay, number of nights... etc. imposed. However, other criteria such as age and status are possible Capacity management and the optimization of the recipe flights Management capacity of a flight is in two stages: On one hand, we must make the allocation of seats by fare class. By means of a conventional quota, tariff classes imbrications or virtual imbrications. On the other hand, overbooking and its effects on the demand for seats should be managed. Indeed, it is essential to note that in the context of Yield Management system, with the aim to reduce behaviours which are disruptive forecasting situations such as late cancellation, no-show and go-show, the companies offer more seats to the reservation than the capacity of the device admit. Late cancellations are any cancellations of seats that occur later which is reducing the probability of resale, the same day or the day before. The No-show are passengers who booked in advance but do not show up for boarding, which implies that they have not cancelled their tickets or reservations folders. The Go-show are passengers who at the counter sale of the company without prior reservation made. They absolutely desire to take flight and are generally willing to pay the full price for their tickets. They contribute significantly to the profitability of the institution. They are difficult to quantify but are offset losses late cancellations and no-show. The purpose is obvious, it is essential to manage the overbooking. The company must manage the consequences of selling effectively places higher than the actual capacity of the unit. Landing, which is the denial of boarding of a passenger or decommissioning situations are difficult to manage by ground staff or sales representative of the company in the ground handling abroad. These situations may have implications for the management of customer relationships The customer relationship management and yield management The different elements of flight management lead to questioning the compatibility between Yield Management programs and loyalty programs. Yield Management in particular seems to have destructive effects on the variables required to develop a relationship of trust between the customer and the company. 55

5 Moreover, for the customer, Yield Management also provides opportunities by allowing particular benefit from better rates. Customers making frequent transactions with the company are also better able to circumvent trade barriers through knowledge generated by their regular use of the service. Finally, we examine the comparative profitability of relational and transactional. The short term profit is probably more compatible with the methods of managing today's organizations than potential long-term benefits from a customer relationship "idyllic" but probably "unreal". However, some exceptions may exist, especially when service users do not bear the cost or price changes as is the case for the customer segment "business". It should be noted that this loyalty relationship is specific. Indeed, the prescriber customer enjoying the benefits offered by a loyalty program is not the purchaser of the service. There is a triangular relationship in which a third party organization pays the benefit; the user enjoys the service and the benefits of the loyalty program. The supplier can be opportunistic with the payer and reward the prescriber s opportunism. III. Yield Management system in RAM 3.1. Processing reservations before the advent of Yield Management system Before 1972, the "drum reservation" was used. This is a great artisanal wheel that is manipulated using a pedal to make reservations manually. Each point of sale called the control booking central for availability on a flight and save a new one. Each book is written in an index card that corresponds to a given flight. At the end of the day, the analyst sends to each point of sale a telex including information on the ticket and the buyer to confirm their bookings. At this moment, the buyer receives a ticket written by a typewriter. The passenger list is then sent to the airport where we check in the name of the boarding passengers. Since 1972, this method was replaced by computerization systems: the electronic "Carim" attached to the system Alpha 3 of Air France. Royal Air Morocco was the first African airline to use electronic booking. But this software was limited to 2 or 3 fare classes. To cope with GDS USA multi-class tariff, Air France has developed the software Alpha 3 and gave the name of New Inventory. But this new software could not provide statistics and did not alarm the analyst that the flight was full. In 1996, Air France has introduced a new software distribution called Amadeus. This software is connected to New Inventory and databases that other companies use. So it shows the sales of each company per class. To facilitate the work of the analyst, others software were connected to New Inventory: Viktor, Everest, Gaeton and Leon. Leon can check if each reservation corresponds to a ticket number. Otherwise, the analyst sends a reminder to the sellers. If the seller does not print the ticket to the customer, the reservation is removed. Viktor is software that cancels no-show. Everest, set up by Air France in 2001, is statistical software that records sales history of no-show, overbooking and go show... and presents forecasts. Gaeton is software that saves boarding at the ground handling. RAM has used this system in Implementation of Yield Management to the RAM The use of this system for the first time was difficult because the staff had to master a new computer system and learn new codes. So the team needed a little time to adapt to changes. With the open sky and the advent of new carriers on the Moroccan market, it became necessary to modernize the way the Moroccan air transport company works to keep the market share and face competition. As part of the restructuring and modernization of its activity Revenue Management, Royal Air Morocco has decided to develop a tool for yield management. After calling Air France Consulting, the project that was initiated in 2001 will go through several stages: needs assessment, tender...etc. The evaluation of the advantages and disadvantages of different solutions and opportunities for short-term assessment to the needs of Royal Air Morocco resulted in the choice of the solution ALPHA3/AIRMAX offered by Air France. 56

6 Data containing information about the historic achievement of flights, schedules and projected Average revenue per original booking class and destination were prepared to feed the system. Royal Air Morocco has attached great importance to the training of the various actors in the system through organizing numerous training sessions for different levels of use. System tests were conducted in two: o Functional Test: check various features offered by the system o Qualitative test: evaluation of the quality of forecasts and recommendations for system outputs ALPHA3/AIRMAX After this period of tests that were inconclusive, Royal Air Morocco went into production from April The impact of the implementation of the system on the company The establishment of a yield management system brings big internally exchange. Yield Management entails redefining the structure of the company, which makes the involvement of senior management necessary to implement this type of system. In the traditional model of a non-yield, management and supply capacity are separate from the price. Before describing the operation of the system and present various modules, we begin by schematize functions on ALPHA3 / AIRMAX. Yield Management system is composed of the ALPHA3/AIRMAX Following functional modules: Figure 1: Functional modules of the AIRMAX Indicator identifying critical operations Reports on flights Transmission of recommendatio ns to ALPHA3 Data Collection: Flight reference, reservations, tariffs...etc. AIRMAX Data Base Automatic processing of program changes Demand forecasts by class/relationship Dynamic Optimizer Performance Indicators Mix Tariff Optimization Oversupply (Economic Models and Quality service) Source: Revenue Management Department RAM 57

7 The implementation of the system AIRMAX is accompanied by a reorganization of pricing department and revenue management as follows: Figure 2: organization chart of Revenue Management Department Groups Spécial Cases Groups and Particular Client Interventions Sector France Revenue Management Trading Room Sector Europe Sector Morocco Sector LC Sector Fields Administration and Studies Support Reporting Flights Regulation Administration Administration AIRMAX Amadeus Distribution Administration ALPHA3 Amadeus Helpdesk ALPHA3 AMADEUS Source: Revenue Management Department RAM The heart of the activity of revenue management is the trading room. The operators of this room are yield analysts. Each analyst is responsible for a set of line within a geographic area. Its mission is to ensure fine setting the system, to ensure that the system is continuously fed by reliable data, to closely monitor the behavior of the application and act to optimize the management of the available capacity. 58

8 The analyst team is comprised of former managers of flights and new recruits engineer profile. The objective of this mixture is to combine the experience with the ability to analyze and control tools and statistics. The system is operational ALPHA3/AIRMAX from April Rate design function is a new function that works in conjunction with the contracts for the design of tariff structures, the creation of new products, defining conditions tariff launch promotional activities. It ensures the consistency of all grids and rules of prioritization in the inventory. After the introduction of this system, revenues increased. This level system required the recruitment of new people person profile engineer and former managers of training flights. It has facilitated the work of analysts and helped to save time. Due to yield management, the RAM was able to reduce the extent of seasonality but we cannot say definitively eliminated because the company was always in high demand during the holiday periods and lower demand in other periods. The systematic application of yield management has a positive impact on the order of 3% to 7% of the turnover. Indeed the Yield Management can use two types of deposits of income: o Deposit volume: modulation levers of price, resource management and overbooking have essentially "Capability" effect allowing capturing additional volumes of demand that might otherwise be lost. o Field unit price: Levers management of tariff quotas, trading business and contracts management packages have mainly an effect on the unit price, they can increase significantly during periods of high demand. Since the share of variable costs is generally low (on the order of 0-20% depending on the sector), a 5% increase in turnover thanks to Yield Management, represent a very significant increase results. However, it should be noted the negative impact yield management generates. This is the overbooking of flights since the introduction of the system in 2003, which is increasingly important and deteriorates the image of the Royal Air Morocco. CONCLUSION For each flight, the adventure begins eighteen months before departure. As soon as it becomes aware of the type of device programmed, the analyst allocates seats in booking classes symbolized by letters (X, Y, X...) that will appear on the screen, beyond the three known classes of passengers (first, business and economy). On a domestic flight, a seat in economy class can be marketed in nine different categories, depending on the buyer (group, company, individual), the date of reservation, residence time...etc. Over the ticket price is high, fewer constraints on its use. Prices will therefore increasing the level of business next golden values: Freedoms of booking, stay and access to aircraft anywhere, until the last moment, have their costs. These different stages through which passes the sale in a yield management system enables both exceptional increase profitability. A very significant increase, especially in sectors such as air transport is very sensitive to changes in costs or prices. However, a negative impact on the image of the company is still possible, because of the management of overbookings is not always successful in Yield Management system. BIBLIOGRAPHY 1. ANTHONY, R.N. (1988) The Management Control Function, Harvard University Press, Boston, 2. AUTISSIER D. (2001) Service gagnant! Comprendre l essor des chaînes», édition EMS. 3. BELOBABA P.P.HPPERSTAD C. (1998) Simulation of O-D Revenue Management schemes, Symposium AGIFORS. 4. BLAYAC T. (2000). La tarification des services de transport : de la tarification uniforme aux techniques de Yield management. 5. BOUQUIN H. (1998). Le contrôle de gestion, 4 ème édition, PUF, Paris. 6. CAPIEZ A. (2003). Yield Management : optimisation du revenu dans le service, Edition Lavoisier. 7. DAUDEL S. VIALLE G. (1989). Le Yield Management: La face cache du marketing des services, Ineréditions. 8. DAUDEL S. VIALLE. G. (1994). Yield Management : Applications to air transport and other service industries Edition Les Presses de l ITA. 9. EIGLIER P. LANGEARD E. (1987). Servuction, le marketing des services, McGraw Hill. 10. HAMIL J. (1993). Competitive Strategies in the world Airline Industry; European Management Journal Vol. 11, No. 3, pp

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