Northwest Airlines Case Study

REVENUE MANAGEMENT & DYNAMIC PRICING

NORTHWEST AIRLINES

Dated: 27th Jan 2012

1. How has the deregulation affected Northwest’s operating performance? What changes has the airline made in response?

Deregulation gave more flexibility to not only northwest but to all other airlines as well. After deregulation, routes and fares became the key competitive factors in the industry.

Northwest started the hub and spoke model of operation. it also started to offer wide array of discount fares for seats on the same flights for which the fare could be changed any number of times even during a single day.

It also adopted a top-down revenue management policy in which the goal was to maximize the number of seats allocated to the full fare travellers and at the same time not spilling the discounted fare customers too much either. This was based on careful customer profiling and price discrimination.

Also, various passenger classes were created for capacity control for each flight that followed a nested buckets approach.

Between 1976 and 1987, the operating performance changed as follows:

| 1987 | 1976 |

Passenger Revenue | 4.4 B | 786 MM |

Total operating revenues | 5.1 B | - |

Operating Expenses | 8% | 5% |

Net Income | 103.0 MM | 51.7 MM |

Traffic RPM | 39.5 | 10.8 |

Load factor | 64% | 48% |

Yield | 11.1 | 7.3 |

ASM | 7.1 | 3.5 |

Customer Price Index | 340 | 171 |

Yield per ASM | 11.05 | 7.31 |

Yield per RPM | 7.12 | 3.54 |

Points to be noted are that Yield per ASM and per RPM had significantly improved along with the load factor leading to a significant improvement in overall yield.

2. What does the cost structure of the airline industry look like? How well has Northwest done at managing its costs?

On an average, industry operates on 3 to 4 % of operating margin in which the operating expense/ASM is on an average has been 7.6 cents per ASM.

The cost structure of the industry mainly comprises of Fuel, salaries,...