U.S., The Excitement Of The Boring Topic Of Yield Management; Amtrak Pricing Schemes

By J. Bruce Richardson, Corridor Rail Development Corporation; April 13, 2021

Yield management is not a subject which generates great excitement. Some of you may have already stopped reading at this point, but you stopped too early, because yield management is one of the great tools for creating cash flow and profitability. Now, some more of you may have stopped reading at this point, too, but, don’t fear, no math is involved if you read further.

The best way to describe yield management is finding the ideal spot where maximum revenue is generated by available inventory. It’s not complicated at the basic level.

An easy example is about a hotel in the Orlando resort area back in the 1980s during the first big wave of growth because of the still-new Walt Disney World and other major attractions. This was a time when an acre of land on International Drive went for the then-astonishing price of $1 million. We look back now and declare how quaint to think that was big money.

A new hotel opened. The management company wasn’t quite sure how to price its rooms inventory. The management struck upon an idea, and it worked. Each week the cost of a single room went up by $10. As long as new room bookings remained strong, the next week another $10 was added to the price. Only when reservations began to flatten did the hotel stop raising the room cost every week and backed off by $10.

The hotel had reached the maximum amount the market was willing to pay for a room. Once they backed off to the price of the week before, reservations began to grow again.

That is a simple form of yield management. The hotel determined the maximum cost willing to be paid for its rooms and maximized revenues.

Here is the definition as provided by Wikipedia: “Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservations or advertising inventory).”

Amtrak currently uses a yield management system like all other common carriers. Because the system results are generated by programmed computer algorithms some have not understood why on a train such as the Palmetto a premium business class seat at a certain time sells for less than a coach seat.

The answer is the yield management computer program recognizes available seats in the coach part of the train are filling up, but less so in business class. Suddenly, a coach seat becomes more expensive – because there are fewer of them available – than a business class seat until more of the business class inventory is sold, too.

Improperly programmed yield management creates results such as that.

Amtrak through the years has tried a number of different pricing structures. Many of a certain age may remember in the early half of Amtrak’s existence standard pricing was a full fare for one way travel, but only a $7 return fare. That concept went away when the airlines – which Amtrak has always followed for fare pricing – dropped round-trip fares and went to one-way pricing for everything.

Then the “zone” fares came along, which greatly simplified things for the people who were creating fares. What zone pricing meant was a blanket fare was created for a group of destinations in a defined zone or area. As an example, if you were traveling on the Empire Builder from St. Cloud, Minnesota to Minot, North Dakota, the fare for that trip would be the same as if you were traveling from St. Could to Rugby, Stanley or Williston, North Dakota. It wasn’t a matter of total distance traveled, it was a matter of going from one zone to another. Much simpler pricing that way, but not a maximizing of revenues.

There have been other pricing schemes, too. On the Northeast Corridor, it costs more to travel in a business class seat on an Acela departure than on a Northeast Regional departure for the same city-pair. Acela is considered a premium service, and the fares reflect that.

Amtrak’s stratospheric pricing of sleeping car accommodations demonstrates someone there figured out passengers are willing to pay well for private accommodations. As with the $7 return coach fare in the early Amtrak years, for many decades the cost of a roomette for one often mirrored that of a medium-priced business hotel for a night. Then, someone discovered yield management. Now, the cost of a bedroom for two or even a roomette for two for overnight travel is closer to that of a luxury resort – without any of the accompanying amenities – and, yet, in normal times they keep selling out on most routes.

Want to enjoy the fall foliage on the Cardinal in the privacy of a Viewliner accommodation? You have to book months in advance, and the price isn’t cheap. You are paying for a combination of the view and demand for the sleeping accommodation.

The reality is, in non-pandemic times Amtrak is successfully selling out sleeping car accommodations at high fares. On a dollar-for-dollar basis, considering all elements it takes to operate a sleeping car, Amtrak’s sleeping cars are the most financially successful part of Amtrak’s business.

When the travel industry fully returns after the pandemic most likely Amtrak could deploy double the sleeping car fleet it does now and still have unfulfilled demand.

Along the way an unfortunate thing Amtrak followed the airlines doing was the elimination of travel agent commissions on the sale of coach fares and accommodations. Three decades ago there were about 35,000 travel agencies in the United States. After the airlines and Amtrak cut out the transportation commissions on sales of tickets the number of travel agencies has been reduced by over half. Travel agents can still make a commission on the sale of an Amtrak travel package that includes the rail travel and a hotel or resort, but not on singularly selling the travel and onboard accommodations part.

It is a great shame Amtrak cut out these valuable conduits to the public. Many American travelers learned through the years professional travel agents provide a good service at no cost to the traveler – because of commissions paid by the carrier for the sale of tickets – and a travel agent, even in the internet era, has far more knowledge at their fingertips than can ever be found by a single traveler online.

Travel agents had the ability to suggest to their clients “have you ever considered taking the train?” and thus an idea was born and to someone who had never heard of passenger train travel in the United States suddenly Amtrak was no longer America’s Best Kept Secret.

Before you suggest travel agents are an antiquated way of booking travel, keep in mind it was the travel agent industry, in full partnership with cruise lines that propelled the cruise lines to have a $37+ billion year worldwide prior to the pandemic. The cruise lines, even with their online booking engines available to their passengers still recognize the value of this cadre of professional, frontline sales agents sharing their personal experiences with their clients and gleefully booking cruises for a commission.

Remember, a commission is merely a built-in cost of the sale of a product. For cruise passengers, booking a cruise directly online or booking through a travel agent costs the same thing. There is no passenger savings for “do-it-yourself” service. It’s the same thing as using a cashier in the grocery store or using the self-check-out line. The groceries you carry out the front door cost the same, either way.

Modern day yield management is a gumbo of factors fed into a computer. For a railroad, it partly amounts to the number of seats on any train, the load factors, the typical turnovers at intermediate station stops, a projection of passengers riding terminal to terminal, and price sensitivity – some refer to that as price elasticity – as shown in our hotel example above.

Add in some promotion aspects and you have a challenge for yield management programmers. We have seen really great fares like $19 sales for a trip over huge distances. The question the public never knows is how many seats are priced at $19, and what is the trigger which kicks in, marking the $19 fares sold out? If there are 100 seats available for sale, there may be as few as 15 or 20 seats available at the $19 level; the rest are sold at higher fares. But, the $19 “loss leader” got the traveling public to take a look at riding the train and most likely many will go ahead an book at a higher fare if the promotional $19 fare is sold out.

This brings us to the subject of fare buckets. Each fare level – or fare bucket – may have different pricing and different conditions attached to that fare level. The highest priced fare probably will be as fully refundable as the carrier’s rules allow. The next lower fare may allow for some date or itinerary changes, but not be refundable. The lowest fare most likely will be a use-it-or-lose-it fare. Once you buy a ticket at that fare level it’s yours forever, with no changes, no exchanges, no excuses.

Fare buckets and promotional fares are all based on which city-pairs are best and worst performers and where managers believe there needs to be an improvement in sales. It’s both a fascinating and complicated choreography that controls whether or not a company maximizes its revenues to produce cash flow and ultimate profits.

This has been a very simplified version of what goes into yield management and just some of the ways Amtrak has behaved in the past towards revenue generation.

As always, the bottom line continually is what level of interest there is for a company like Amtrak to be as self-sufficient as possible while meeting its chartered mandate. Good yield management plays a major part in that endeavor.

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