How to bump passengers from flights?

January 14, 2011

Overbooking a flight enables airlines to ensure that they fly with as much capacity as possible – given that 8-10% of passengers do not show up for a flight, you want to make sure that there are not too many empty seats on the plane.  But if you overbook, you must be ready to find yourself in a situation in which you have more paid passengers than seats. Since sitting in the aisle is probably against FAA regulation, that means the airline might need to bump one or more passengers off of the flight. How should this be done?

The standard method is to offer a fixed benefit – say a $400 flight voucher – and hope that enough people take the deal. If that doesn’t work, the airline sweetens the deal. As a last resort they have to involuntarily bump a passenger (which costs them more).

According this WSJ 1/14/11 article, Delta has another idea – when passengers check-in, ask them how much they are willing to accept to be bumped from a flight (a $ amount) and choose the lowest bidding passengers if necessary.  They have apparently be trying it out for one month.

This is an interesting idea.  There are two obvious advantages: (i) it reduces the time and effort to solicit passengers off of a flight when you discover that you need to bump some people and (ii) it is hard to imagine that they would end up paying more to bump passengers. I suspect that passengers are willing to accept less cash to be bumped when they check in than when they are about to walk onto a plane – the cost of getting bumped is more tangible when you are watching the plane pull away from the gate. Furthermore, I think some passengers will bid less than the $200 or $400 that the airline would normally pay.  (There are many ways to run this auction, but it seems that passengers receive their bids, rather than the highest clearing bid or the bid of the lowest non-bumped passenger.)

However, as an airline, do you want to ask every passenger to report how much they want to be paid if you fail to serve them? Imagine booking a vacation at a Four Seasons Resort and receiving an email like this: “We are excited that you will be staying with us and we look forward to catering to your every needs so that you will have a relaxing an memorable visit with us. On occasion, we are unable to accommodate all guests with reservations. If that were to occur, could you please let us know what the minimum cash you would accept to be booked into a partner hotel nearby to our facility?” It doesn’t scream customer service. But “customer service” may not be the first thought when people think of airlines these days. Air travel is a commodity and efficiency matters. I wonder if this experiment – like charging passengers for bags – will stick.




What Disney does to reduce wait times

January 5, 2011

Understanding (and reducing) waiting lines (Queues) is central to Operations Management. Waiting in line is often one of the most memorable experiences when visiting theme parks such as Disneyland. The long wait times limit the number of rides a visitor can experience per day. Disney research shows that the average visitor only can enjoy nine rides per day. From a “value-add” perspective, this is a rather poor performance.  A ride might take five minutes. So we are looking at 45 minutes of value add (ride) time relative to an eight hour day. What can be done to improve this? Improvement actions in this environment can be categorized into three groups: (a) Increase capacity: in some cases, it is possible to increase capacities at the attraction. In the Pirates of the Caribbean attraction, Disney is able to increase the launch frequency of boats as demand increases. (b) Make the waiting more pleasant: Disney dispatches greeters and entertainers to reduce the perceived waiting times when it is not possible to reduce the actual waiting time. Simple video games are now added to Space Mountain as a way to turn unproductive (and not amusing) wait time into something fun. (c) Divert demand to less crowded areas: if you can’t increase capacity, try to reduce demand. There are 40 rides / attractions in a typical park. But demand tends to focus on some high visibility attractions as those are perceived as being the most fun. When wait times in those areas grow long, Disney tries to create some “buzz” in other areas of the park, trying to divert demand and thus balance capacity utilization.

For a more detailed story, see:

Blockbuster – doomed by its own medicine

September 25, 2010

Blockbuster filed for bankruptcy protection this week, which was expected for quite some time (NY Times, 9/23/10).  Blockbuster surely had a good run, but ultimately was doomed by its own medicine.

Blockbuster grew to dominate the video tape/DVD rental business by providing convenience to its customers – many well-located stores and many copies of the movies/shows customers wanted to see. If you took the time to go to a Blockbuster, you knew you would find something worth watching.  This convenience was provided in large part by negotiating revenue sharing contracts with the movie studies, thereby allowing Blockbuster to stock a large inventory even when at item was first released.

Fast forward to today. I live two blocks/200 yards from a Blockbuster but I was surprised to discover a couple of weeks ago that it was gone.  My 15-year old son explained it to me – “why would I walk to Blockbuster to pay $5 for a movie when I can download the same movie to my PS3?” I had no idea that a PS3 could do that (isn’t it a game machine?) – clear evidence that the generation gap I swore I would avoid is right there in front of me. But I digress. The point is that Blockbuster is no longer as convenient as the alternatives – RedBox, Netflix, etc. It is no longer as important to have many copies of new releases in a store because customers don’t feel the need to leave their home. It is true that Blockbuster makes content available sooner to customers, but that doesn’t seem to have the value that it use to have – my kids troll around for movies of all ages and don’t  rush to see the latest thing.

It is unlikely that Blockbuster will ever regain the dominance it once had. Surely, it will not do it via its 3000 stores, a number that will have to decline. The fall of movie rentals has been predicted for at least a decade – the technology has finally advanced to the point to make it happen.

Sayonara to “stack ’em high, watch ’em fly”

May 24, 2010

Inventory management has been changing at Polaris (WSJ 5/24/10) – they have been dropping their dealers’ inventories for the last four years.  With the old system dealers orders twice per year and were given generous incentives to stock up, in short, trade promotions. The article doesn’t mention some key details, like while dealers  ordered twice per year, dealers probably took deliveries throughout the year.  And, dealers probably ordered at the same time, rather than staggered throughout the year.

The new system has dealers ordering once every two weeks. The match between supply and demand with this new system should be much better. With the old system, each dealer had to guess what they would need over the next six months (assuming Polaris didn’t build in anticipation of the next set of dealer orders). Invariably, they would make some mistakes – ordering too much of some products, not enough of other products. To correct errors, dealers probably swapped inventory during the six month cycle, but that isn’t the most efficient way to move inventory around.

Enter the new system. Now dealers order every two weeks and so their orders will far better reflect what they actually need and what is actually selling. In short, the system should be able to reduce dealer inventories *and* better meet demand, unless demand is picking up across all dealers faster than Polaris can produce.

According to the article, this is a trend in the industry – all firms are moving to shorter order cycles. Why? It may reflect competition among suppliers – this is a great deal for the dealers and so to keep a dealer you need to be more attractive. It also may reflect a calculus that the sales incentive of the channel stuffing strategy is not worth the better supply-to-demand matching of the current system. One thing is for sure, Polaris has certainly made some big changes in how it trades with dealers:

Buy now! Limited supplies!

November 19, 2009

Related to my post yesterday, the NY Times today has an article on retailers intentionally keeping stocking quantities low (NY Times, 11/19/09, Luxury Stores Trim Inventory and Discounts).  If the Brioni leather bomber jacket is what you need for that special someone this season, you better get to Saks fast because they have only 1 left – at a mere $5295! (And then you need to see a therapist to explore why you feel compelled to spend $5295 + taxes on an article of clothing which is not suitable for climbing Mt Everest or walking on the moon.)

The idea is simple – intentionally stock less than a “normal” amount so that you will not have too much inventory left over which needs to be discounted. Because if you have too much inventory left over, then customers may anticipate this and not plop down $5K to buy at the regular price, thereby certainly ensuring that you will have to discount.  Or, you are doing this to generate a sense of scarcity, and therefore desirability:

“What’s luxury retailing all about?” Mr Sadove said. “It’s about a scarcity of supply.”

Given that we are talking about ultra luxury products, I wonder if the scarcity argument holds water. If you are spending $5K on a jacket, then you better be sure that you will never see another person walking down 5th Avenue with that jacket on. But only people walking down 5th Avenue would be willing to spend that kind of money on a jacket (i.e., not everyone has the same probability of encountering another person with this jacket on). So unless that jacket is *unique*, it is not scarce enough.

Next, the standard approach to avoid markdowns with luxury goods is to not markdown! A $5K jacket probably has a very healthy margin (say $4,750), so if you have a few left over, then ship them back to the producer, take more time to sell them, or burn them. But whatever you do, don’t markdown the price! Having a few left over jackets that need to be sold in some other country with the label ripped out may be cheaper than stocking out when somebody wants to pay you an obscene amount (ok, I’ll stop harping about the ridiculousness of the price).

The article recognizes that the best approach is to start with a limited supply and then replenish only if necessary. This is feasible in some categories (contemporary apparel and women’s shoes) but not in others (European designers). Of course, this reminds us of Zara:

The graph above nicely illustrates the Zara strategy – start with a more reasonable price and a limited quantity, replenish if necessary, and don’t mark down all that much.  The net effect is that your total profit (light blue) can be higher.

And there is one key lesson from Zara that is missing in the discussion of Saks.  If Zara runs out of one item, they generally have another item available that is a close substitute. If you like a particular black bomber jacket at Zara, then you should buy it because (a) it will not be marked down and (b) if you wait then you will have to buy a different black jacket.  Either way, Zara gets the sale. In the NY Times article, they are suggesting that it can be better to simply stock out.  If you don’t have an adequate substitute, then that is really a costly strategy.  Being smart doesn’t mean you are willing to incur costs. Being smart is avoiding costs while maximizing revenue.

Revenue management at Amtrak

June 23, 2008

The rise in fuel prices is sending passengers to Amtrak and Amtrak is using “airline-style yield management” to increase revenue…