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CASE STUDY 8.2W

Chapter 8 Transporting the Tourist

Yield management in budget airlines: The case of easyJet
Gerald L. Barlow

Introduction by the end of 1997. Routes began to expand and by 1998

The budget sector of the airline industry in both the UK and these included Aberdeen, Edinburgh, Glasgow, Inverness
USA dates back to the 1950s and growth in demand for new and Belfast, complemented by Holland, Switzerland, Spain,
holiday destinations, and the growth in air transportation. France and Greece on mainland Europe, and adding
Initial budget airlines concentrated on the holiday market, Liverpool as a second English base. The company was
offering charter flights. In Europe this meant Spain, France, conceived and run by a charismatic chairman, Stelios Haji-
Greece and the Balearic Islands in the summer and Ioannou, then a 31-year-old Greek graduate of the London
European ski resorts in the winter. Although this market still School of Economics, who admits the idea came as a result
exists with specialist companies in the UK like Britannia Air, of Virgin Airlines’ first attempt to operate a franchise on the
the start of low-cost flights began with ‘the battle for the Athens to London route.
transatlantic business’ as seen by Freddy Laker, with Laker The company operates a no-frills airline, based on short-
Airways and The People’s Express. The true budget airlines, haul flights, aiming at maintaining a low-cost strategy and
however, took shape with deregulation in the United States. providing a quality low-price flight. In the autumn of 1997
The most successful budget airline to develop in America Haji-Ioannou signed a $500 million order for a number of
was SouthWestern Airlines, while the main player in recent brand new Boeing 737-500 planes, due to enter service by
years in the UK has become easyJet. easyJet is probably the end of 1999, to provide the needed capacity for the
following the SouthWestern formula in its operations and company’s expansion up to six million passengers. Haji-
development of service and routes. The earliest European Ioannou’s declared ambition is for easyJet to be the
low-cost or budget airline still operating with significant ‘McDonalds’ of flying, and he is perhaps on course for this
passenger numbers and routes in the European market is aim. The image easyJet is creating is one of simple efficient
the Irish carrier Ryanair. The basic premise of business in the service, for quick easy use. From the attractively simple but
budget airlines is of course similar to that of the major inter- functional black trousers or skirts with orange shirts of the in-
continental air carriers. There are, however, major differ- flight crew, to the very effective and efficient online internet
ences between the intercontinental carriers and the budget booking system which offers you a simple quick way to book
airlines in both the United States and Europe, which have your tickets (thus also providing a good view of a yield
knock-on effects throughout the budget airline operations. management system working minute by minute), easyJet has
The major differences between the operating processes and developed an effective and efficient operation, a single posi-
cost base of both types of carriers, are outlined in Figure tive brand image and a successful marketing strategy. easyJet
8.1W. To be effective easyJet operates from low-cost airports and Haji-Ioannou’s commitment to Luton has probably done
(Luton and Liverpool) and flies to low-cost airports (the costs more in its first two years for Luton airport than any other
charged to the airline operators are lower at airports like single company or person, including Lorraine Chase and
Luton than major international centres like Heathrow or Campari! Future development plans for easyJet, to allow it to
Gatwick). Additionally, it operates only one type of plane, achieve its growth potential and fill the capacity created by the
the Boeing 737-500, which again helps to reduce operating new plane acquisitions, include considering additional desti-
and running costs. This has benefits for yield management nations, such as Munich, Copenhagen, Oslo, Hamburg,
as it mans only one type of capacity, consisting of 159 seats Berlin and Stockholm, along with plans to develop further the
or units. facilities at Luton airport. Complementary company develop-
Yield management within the airline industry may be a ments include a chain of internet cafés and a low-cost car hire
prerequisite, but in the budget airline sector it is still develop- operation, both of which have implications for the use of yield
ing. Whether it is called yield management, revenue manage- management. Has easyJet been successful in its aims and
ment or revenue maximization its aim or purpose is clear: to objectives to date? By most methods of judgement, the
achieve the highest possible income from every single flight answer must be yes. But perhaps British Airways’ attitude is the
within an airline’s portfolio of flights and routes. To investigate best measure. In 1996, it described easyJet as the ‘peanut
how budget airlines use and gain competitive advantage airline’ at the time of its launch, but just two short years later
from this technique, easyJet is used as an example. British Airways had announced the launch of its own low-cost
airline, GO. Imitation, it is said, is the greatest of compli-
ments. If you are uncertain of the success of easyJet the best
easyJet answer is to try it for yourself. easyJet has seen an opportunity
easyJet began in November 1995, with two aircraft operat- to develop direct marketing and sales of short-haul European
ing a three flights a day programme between Glasgow, flights and has used all the operational tools necessary to
Edinburgh and its base at Luton. Business was brisk and ensure its success, one of the main tools being the develop-
turnover rose from £25 million in 1996 to over £50 million ment of its own dedicated yield management programme.
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Yield management at easyJet Figure 8.9W highlights a similar booking pattern, but with
Part II Understanding the Tourism Industry

easyJet uses an automated yield management system late demand (business sector), and shows the price levels
based around maximizing the revenue on each flight, every closing later and reopening again as the take-off date
day. The easyJet reservation system is somewhat different comes nearer, in the aim of increasing demand by offering a
from those of most of its competitors in that all its booking lower-cost seat.
must be made directly with the airline reservations staff, via Why is yield so important to easyJet?
either the phone system or the internet, as no agency book- 1 Unlike the major airlines, easyJet has a price structure
ings are accepted. The yield management system, with only a small degree of flexibility: the range in price
managed by the revenue manager, is one specifically available for any destination at easyJet is low. For
developed for and by easyJet, and is modified on a regular example, Nice starts off at a low of £35 per seat,
basis and adjusted as operations mature. easyJet has extending up to £129 depending upon level of bookings
developed the model to cover each flight route, for every and number of days out from take-off. At BA, for a
flight and every day. The principal aim is maximization of similar flight, the prices ranges from £284 standard fare,
revenue, while ensuring that the appropriate balance of to £351 for business class, and the reduction can be very
passengers is met. wide nearer take-off, depending upon source, e.g.
easyJet does not segment its customers. However, it does bucket shop, travel agents’ special late offers. This gives
segment its flights into the following categories: the major airlines a larger range of discounting
1 destination/route opportunities, and more chance of a contribution to their
fixed costs. (Both examples of prices are current at time
– business
of writing and one way.)
– leisure
2 easyJet offers no agency bookings, and passengers can
2 flight time only book or inquire directly via the telephone sales staff
– morning and evening flights and the internet. Therefore it is essential to have an easy
– daytime flights. and quick reservation system that shuts out and opens
the various pricing levels as the take-off date nears, and
easyJet considers that there are, in its sector, two kinds of the booking pattern becomes clearer. Any problems or
destination. The first is business destinations, like Glasgow, delays within the computer yield management booking
where the highest percentage of passengers are usually system could result it:
going for a short stay for business reasons. The second a staff giving different rates
destination type is a non-business or leisure destination, like
b lower rates than are necessary being given, and
Palma, where the greatest percentage of passengers are
therefore loss of revenue occurring
going for non-business reasons with a longer stay over. The
second segmentation is that of flight time, where the early c staff being able to differentiate prices as a personal
morning, early evening, weekday flights tend to be regarded choice
as business sector, while the middle day, late evening and d customers receiving unequal treatment, and thus
weekend flights are non-business or leisure. Each segment/ becoming dissatisfied.
sector has differing booking patterns. 3 A system which instils confidence in the operation for
Figures 8.2W–8.7W show different patterns of bookings. management, sales staff and customers.
Figure 8.2W shows non-business customers, and Figure
4 This system permits the staff to achieve a high level of
8.3W business customers, with Figure 8.4W combining
operator efficiency, due to certainty, accuracy and
them into a yield booking pattern. The prices can then be
simplicity, which is important to the company, and the
established around these expected patterns. The cheapest
operators who are paid on results (bookings achieved).
are available until, say, 25 seats are sold, then the next price
bracket until 65, then 80, when the almost full price 5 The easyJet internet system is only possible with the use
becomes available. The full price opens approximately ten of a real-time yield management system. This system has
days from take-off, when the majority of business segment proved so successful that during November 1999 it set a
fliers can be expected. Figure 8.5W shows actual bookings world record for airline bookings achieved via the net,
received as well as the yield plan. 60 per cent of all bookings for a specific day.
Figures 8.6W and 8.7W indicate the yield plan for non-
How does this system vary from the traditional yield system
business/leisure flights, or weekend flights, together with an
operated by the major carriers?
actual booking flow.
Figure 8.8W shows a flight yield pattern with the actual 1 The major carriers have interconnecting flights, which
bookings received, along with the sales book-out price means that yield management can be used to maximize
levels. This indicates that if the bookings received exceed 40 the income over more than one flight. The use of low-
by or before 45 days from take-off, then the rate increases, cost flights encourages use of other flights, usually more
and if it exceeds 60 seats sold by or before 35 days before profitable ones. easyJet does not have interconnecting
take-off, the price increases to the next level, and so on. flights or arrangements with other carriers.
 3
2 easyJet does not have cancellations, whereas the major forecasting of future events that yield management was

Chapter 8 Transporting the Tourist

carriers offer this opportunity, with varying complexity. successful. Now easyJet’s historic records are becoming
3 easyJet does not use travel agents, or any form of agency more useful, as it is becoming more established. But,
bookings, and this makes the reservations system easier with each new route easyJet opens, problems restart.
and fully centralized. 4 Availability and/or capacity management: limiting or
4 easyJet does not operate tickets, thus making last-minute shifting the availability of certain products or services
bookings easier to operate. according to customer demand. This is the main
backbone of yield management in the airline sector. The
5 easyJet operates from fewer airports, has only one
capacity in terms of seats at easyJet is fixed, and is
central reservations base and has only a limited number
managed by good pricing to maximize the use of the
of destinations.
limited seat capacity to obtain the maximum sales
Other major differences between easyJet and the majority of volume and to satisfy customer demand.
other airlines include: 5 Reservation/negotiation: in some sectors, management
can achieve better yield with the management of price
1 easyJet runs only one type of plane, the Boeing 737-500,
and availability, through the ‘up-selling’ of specific areas
which makes operations and reservations much simpler.
to higher more expensive products or ‘cross-selling’ to
2 easyJet offers few onboard services, no duty-free and alternative products, so ensuring an even spread of
only limited catering service, which is outsourced. sales. Here easyJet is restricted as it operates a single
3 easyJet operates without a ticket and has no actual class product, and the pricing is fixed irrespective of the
boarding cards. type or segment of customer. The price offered will be
4 easyJet runs with very few ground handling crew, and an dictated by the yield management system, related to the
extremely sales-orientated central head office. seat availability and the closeness of take-off date.

5 New plane purchases have been made and fit into the
Preconditions for yield management are:
easyJet model, i.e. Boeing 737-500s.
6 No external sales offices, or airport sales offices, are 1 Perishable inventory/or seasonal demand: seats on an
operated by easyJet. It has no linked or joint sales. aircraft are extremely perishable, for if easyJet fails to sell
seats on say the 7.00 a.m. flight to Glasgow, those seats
7 Pricing is based strictly upon a revenue maximization
sales are lost for ever.
process that matches the aims and objectives of yield
management. 2 High fixed costs or sunk costs: thus resulting in a low or
relatively low marginal cost of selling one extra unit.
All these factors help the company to maintain a low vari- Here the cost of a Boeing 737-500 is a very high fixed
able cost, a key component in any successful yield manage- cost, while easyJet’s marginal cost of selling one extra
ment system, and provide an opportunity for leverage seat on, for example, the 7.00 a.m. flight to Glasgow is
against its major competitors. very low.
3 Fixed capacity either overall or in the short term: easyJet
Why do airlines pay so much attention to yield? operates a fixed seat capacity throughout the fleet, on all
Airlines operate in a highly competitive market, and the low- routes and flights.
cost operators, by the nature of this, are fiercely competitive. 4 Advance purchase of service/product: easyJet will only
The environment in which they operate is one of high fixed accept pre-booked flights.
costs, fixed capacity in the short term, a perishable product
and seasonal variable demand. According to Arthur The use of a yield management system has enabled easyJet
Andersen (1997), easyJet fulfils all the established criteria to operate its low-price policy successfully from its concep-
for the effective use of yield management. Dr Scot Hornick tion. The main skills needed are developing a good fore-
of Andersen Consulting has identified five ‘functional casting plan and history to permit the yield system to be
aspects of yield management’, as outlined below: successfully developed. The differences between the levels of
yield management within the industry are based upon the
1 Market segmentation: an area that easyJet feels is level of sophistication and actual understanding of the tech-
inappropriate, only segmenting by destination and flight niques and markets. Lack of systemization, improper use or
time. lack of understanding of the system can lead to erroneous
2 Price management: systematically offering different results and decisions. easyJet ensures successful operation
prices to different customer segments in response to through simple systematic operations, and constant modifi-
demand, the main issues for easyJet. cation of the system as the market continues to develop.
3 Demand forecasting: forecasting future demand on the
basis of past sales and known future events. Initially Obstacles and success factors
easyJet has obvious problems, as past history was short The barriers to the use of yield management in the airline
and demand was increasing. It was through good industry are few, but the level of operation and sophistication
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will depend upon the complexity of the flight programmes 5 A good information system: to match all the requirements
Part II Understanding the Tourism Industry

and price structures. Table 8.4W summarizes them. of a successful yield management system, the operator
Kimes (1989a) identifies seven key techniques necessary requires a great deal of accurate information. It is in this
for the success of a yield management system. area that the company has its greatest problem, since it
is very young, and therefore lacks the indepth history of a
1 Ability to segment: easyJet has identified two major
company like British Airways. Additionally, the capturing
segments within its operations.
of such data is very costly, in terms of both the methods
2 Perishability of inventory: clearly airline seats, like hotel used and staff time. This has resulted in easyJet only
rooms, are a highly perishable commodity. capturing information on actual bookings. The history on
3 Product sold in advance of use: easyJet, more than most denied bookings is not recorded, an item which most
airlines, insists on 100 per cent sales and payment in writers (e.g. Orkin 1988; Kimes 1989a, 1989b; Jones
advance, and offers no in-airport sales desks. and Hamilton 1992; Leiberman 1993) suggest is a
4 Fluctuation in demand: clearly with a number of prerequisite for successful yield management. However,
destination and a number of flights at different times per it is an area in which the company acknowledges
day each day of the week, the demand for the product is information is desirable, and hence this is more a
subject to considerable variation. question of the cost of collection and the time involved.
The collection would need to be undertaken by sales
5 High fixed costs: again, the cost of a 737-500 airline is
staff, whose job is designed to be as time efficient as
relatively high compared to the ticket price.
possible to help to maximize both the company’s and the
6 Low marginal sales costs: here easyJet has a competitive employees’ income.
advantage over most of its competitors, having very low
variable costs.
How does this system fit in with senior management
7 High marginal production: here all airlines have a high
plans?
marginal production cost. If the plane is full, and an
Clearly easyJet is focusing on Michael Porter’s (1985) low-
extra seat is required for a customer, they are unable
cost strategy, and its version of yield management helps it
simply to produce one more seat and must decline,
along this path. However, without top management commit-
upgrade, provide an additional plane or compensate. It
ment the process would fail. To this end, one person, the
is here that easyJet, which operates a full-plane policy,
revenue manager, has full responsibility for the development
with no standby and no interconnecting flights that can
and management of the system. The system is designed to be
cause problems, has a cost advantage.
user friendly, very simple in operation and adaptable to any
Kimes (1989b) also identifies five core requirements for the changes brought about by internal or external factors.
operation of a yield management system.
Conclusion
1 Booking patterns: yield management systems require
information on how the reservations are made for a Theoretically yield management as a management tool in
specific date. It is from this information that the system the airline industry has an enormous potential to increase
tracks and creates a picture of the booking process in the the financial performance of the airline. Sir Colin Marshall
future, and from the past for the future. It is through this (1992) attributed BA’s success to cost cutting and sophisti-
process that easyJet is able to: (a) operate is online live cated yield management. However, for a newcomer and a
reservation system, and (b) create the necessary historic low-price airline, it is not going to be easy. However, easyJet
bookings profiles. has created a successful system within a short time. It first
flew in November 1995, and has seen its market share
2 Knowledge of the demand patterns by market segments:
grow from 0 per cent in June 1996 to 29 per cent by
as stated above, easyJet has identified, and operates
December 1997 on the UK–Nice market (Nice Airport
with, two specific flight segments.
1997). There are many lessons that companies, not just in
3 An overbooking policy: most airlines operate an the airline sector, can learn from easyJet’s dedication and
overbooking policy, which when it goes wrong results in belief in the systems, which were necessary if it was to
upgrades and stand-down discounts. easyJet works with become truly successful. The findings presented here show
very tight margins, without the back-up of business or how with determination and belief companies operating in
first-class upgrades to cover this situation, hence it a number of sectors could create and use a yield manage-
operates to a pre-booked full-seat capacity. ment system, suited to their specific needs to help create
4 Knowledge of the effect of price changes: the team in more successful operations. The system developed by
charge of yield management need to know how changes easyJet perhaps has more in common with some hotel
in price will affect their customers, their occupancy and operations than many of its airline competitors, and
profitability. The major airlines change prices thousands of certainly a number of them could learn from the easyJet
times a day, mainly in response to competitive pressure experience. As Porter (1985) has pointed out, success comes
(Kimes 1989b). Clearly this level of yield management from innovative products and service, often introduced by a
system is sophisticated beyond the current needs of easyJet. competitor new to the industry.
 5
Source: Ingold, A., Yeoman, I. and Leask, A. (2000) Yield Kimes, S.E. (1989b) ‘Yield management: a tool for capacity-

Chapter 8 Transporting the Tourist

Management: Strategies for the Service Industries. London: constrained service firms’. Journal of Operations
Thomson Learning, pp. 198–210. Management, 11 (4): 348–63.
Leiberman, W.H. (1993) ‘Debunking the myths of yield
References management’. Cornell Hotel and Restaurant
Arthur Andersen (1997) Yield Management in Small and Administration Quarterly, 34 (1): 34–41.
Medium-sized Enterprises in the Tourist Industry. Brussels: Marshall, C. (1992) BA Company Report. London: British
Directorate-General XXIII, European Commission. Airways.
Jones, P. and Hamilton, D. (1992) ‘Yield management: Nice Airport (1997) Monthly flight data, January.
putting people in the big picture’. Cornell Hotel and Orkin, E.B. (1988) ‘Boosting your bottom line with yield
Restaurant Administration Quarterly, 33 (1): 88–95. management’. Cornell Hotel and Restaurant
Kimes, S.E. (1989a) ‘The basics of yield management’. Administration Quarterly, 28 (4): 52–6.
Cornell Hotel and Restaurant Administration Quarterly, Porter, M.E. (1985) Competitive Advantage. New York: Free
30 (3): 14–19. Press.

TABLE 8.4W Barriers to yield management

Business-internal Environmental
(Features of the business itself which interfere with yield (Features of the environment in which the business operates)
management)

Attitudinal Operational Infrastructural Regulatory

(Features of business philosophy, (Aspects of the way a (Factors in the business (Governmental restrictions on
attitudes towards pricing, business operates) environment which impede a business’s ability to practice
understanding of yield the effectiveness of yield yield management)
management) management)

No awareness of YM. Cost of technology. Insufficient supporting Governmental price

infrastructure. restrictions.
Insufficient management skills; Dependence on contract Appropriate off-the shelf
incompatible business business with fixed prices. computer YM technology not
philosophy. readily available.

Resistance to formalizing Insufficient information. Rigid seasonality of demand.

information.
High staff turnover.

Negative misperceptions or Undifferentiated commodity

scepticism towards YM. product.

No clear profit motive. Capacity too small.

As applied to easyJet

Clearly fully aware. Developed own New operation real issue. High risk of governmental
technology; cost low restrictions removed, thus
compared to start-up costs. opening way for easyJet type
operations.
Management skills acquired. High cost, so developed
own model.
New organization and staff, so Lack of information a clear
no problems. early problem.

Very clear profit and financial Staff new, constant training,

incentives. ease of operations.

Source: Arthur Andersen (1997)

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Part II Understanding the Tourism Industry

The costing of running a budget airline – based on easyJet

Fuel

Maintenance

Ground handling

Pilots

Cabin crew

Telesales staff

Advertising

Insurance

Operating costs

Aircraft ownership costs

Air traffic control fees

Inter-continental airline costs

Expensive airports

Extra cabin crew for

first and business class

In-flight catering

Lower aircraft utilization

Same costs as easyJet

Seats used for first class

Computer reservation fees

Travel agents commission

Ticketing costs

Expensive advertising and

central admin cost

FIGURE 8.1W Intercontinental airline costs

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Chapter 8 Transporting the Tourist

80

Number of seats booked 60

40

20

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.2W Airline booking patterns – leisure segments

100

80
Number of seats expected

60

40

20

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.3W Airline booking pattern – business segment

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Part II Understanding the Tourism Industry

160

140

120

100
Seats

80

60

40

20

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.4W Combined booking pattern (date, time, destination)

160
Yield plan
140
Actual bookings
120

100

80

60

40

20

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.5W Booking plan showing yield forecast and actual (date, time, destination)
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150

Chapter 8 Transporting the Tourist

Yield plan

100
Seats sold

50

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.6W Yield plan for non-business destination

150
Yield plan

Actual bookings

100
Seats sold

50

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.7W Actual booking chart – non-business destination (date, time, destination)
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Part II Understanding the Tourism Industry

150
Yield plan

Actual bookings

100
100
Seats pricing (£)

75
65

50
45

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.8W Yield pattern of actual bookings received and sales bookout price levels

160
Yield plan
140
Actual bookings
120

Ticket price shut down

100
Seats booked

80

60

40

20

0
60 55 50 45 40 35 30 25 20 15 10 5 0
Days from take-off

FIGURE 8.9W Booking pattern for late demand