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INTRODUCTION TO MANAGEMENT SCIENCE 3

MANAGEMENT SCIENCE IN ACTION

Revenue Management at American Airlines*
ne of the great success stories in management to as yield or revenue management. The OR group
O science involves the work done by the opera- used forecasting and optimization techniques to deter-
tions research (OR) group at American Airlines. In mine how many seats to sell at a discount and how
1982, Thomas M. Cook joined a group of 12 opera- many seats to hold for full fare. Although the initial
tions research analysts at American Airlines. Under implementation was relatively crude, the group contin-
Cook’s guidance, the OR group quickly grew to a staff ued to improve the forecasting and optimization mod-
of 75 professionals who developed models and con- els that drive the system and to obtain better data. Tom
ducted studies to support senior management deci- Cook counts at least four basic generations of revenue
sion making. Today the OR group is called Sabre and management during his tenure. Each produced in
employs 10 000 professionals worldwide. One of the excess of US$100 million in incremental profitability
most significant applications developed by the OR over its predecessor. This revenue management sys-
group came about because of the deregulation of tem at American Airlines generates nearly $1 billion
the airline industry in the late 1970s. As a result of annually in incremental revenue. Today, virtually every
deregulation, a number of low-cost airlines were able airline uses some sort of revenue management sys-
to move into the market by selling seats at a fraction of tem. The cruise, hotel and car rental industries also
the price charged by established carriers such as now apply revenue management methods, a further
American Airlines. Facing the question of how to com- tribute to the pioneering efforts of the OR group at
pete, the OR group suggested offering different fare American Airlines.
classes (discount and full fare) and in the process
created a new area of management science referred *Based on Peter Horner, ‘The Sabre Story’, OR/MS Today (June 2000).

l Samsung used MS to cut the time taken to produce microchips, increasing
sales revenue by around £500 million.
l A UK hospital used MS to develop a computerized appointments system that
cut patient waiting times by 50 per cent.
l Peugeot applied MS to its production line in its car body shops where
bottlenecks were occurring. MS improved production with minimal capital
investment and no compromise in quality contributing US$130 million to
revenue in one year alone.
l Air New Zealand wanted to improve the way it scheduled staff allocation and
rostering. Applying MS methods enabled the company to save NZ$15 million
per year as well as implement staff rosters that built in staff preferences
l Procter and Gamble, the consumer products multinational, used MS to review
its approach to buying billions of US$ of supplies. Over a two year period this
generated financial savings of over US$300 million.

Source: Operational Research Society and the Institute for Operations Research and the
Management Sciences (INFORMS)
And to achieve these results organizations need people who understand the
subject – management scientists – and this is why this textbook has been written.
The aim of this text is to provide you with a number of the technical skills that a
management scientist needs and also to provide you with a conceptual understand-
ing as to where and how management science can successfully be used. To help with
this, and to reinforce the practice of management science, we will be using Manage-
ment Science in Action case studies throughout the text. Each case outlines a real

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