Hotel Management with Foreign Collaboration

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  • Topic: Revenue, Hotel, Yield management
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  • Published : June 5, 2006
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A Comparative Revenue Analysis Of
Hotel Yield Management Heuristics

By

Timothy Kevin Baker
Bass Hotels and Resorts, Inc.
Three Ravinia Drive, Suite 2900
Atlanta, GA 30346-2149
E-mail: baker.tim@hiw.com

and

David A. Collier
The Ohio State University
1775 College Road
Columbus, OH 43210
E-mail: collier.4@osu.edu

A Comparative Revenue Analysis Of
Hotel Yield Management Heuristics

ABSTRACT

Yield management is the dynamic pricing, overbooking, and allocation of perishable assets across market segments in an effort to maximize short-term revenues for the firm. Numerous optimization heuristics for allocation and overbooking exist for the airline industry, whose perishable asset is the airline seat. When an airline departs, no revenue is gained from the empty seat(s). In the hotel industry, the perishable asset is the hotel room—once a room is left empty for a night, that night's revenue cannot be recaptured. The literature on yield management heuristics for the hotel industry is sparse. For the hotel operating environment, no research has adequately (1) integrated overbooking with allocation, (2) modeled the phenomenon of hotel patrons extending or contracting their stay at a moment's notice, or (3) performed a realistic performance comparison of alternative heuristics.

This research develops (1) two hotel-specific algorithms that both integrate overbooking with the allocation decisions, (2) a simulation model to model realistic hotel operating environments, and compares (3) the performance of five heuristics under 36 realistic hotel operating environments. Seven conclusions are reached with regard to which heuristic(s) perform best in specific operating environments. Generally, heuristic selection is very much dependent on the hotel operating environment. A counterintuitive result is that in many operating environments, the simpler heuristics work as well as the more complex ones.

Subject Areas:Heuristics, Service Operations, and Simulation
A Comparative Revenue Analysis of
Hotel Yield Management Heuristics

INTRODUCTION
Yield management is the dynamic pricing, overbooking, and allocation of perishable assets across market segments in an effort to maximize short-term revenues for the firm. Yield management provides some success stories and a few non-publicized failures. For example, American Airlines increased its revenues by an estimated $1.4 billion over the 1989-91 time frame. Net profits after taxes were $892 million during that same period (Smith & Leimkuhler, 1992). Hertz rental cars, Marriott International hotels, and the Royal Caribbean Cruise Line have also benefited from yield management implementations (Lieberman, 1992). Hertz increased its annual revenues by 1-5% annually. Marriott improved its 1991 revenues by $25-35 million. Royal Caribbean Cruise Lines obtained a revenue increase in excess of $20 million for one year. However, these benefits are not easy to obtain (Hanks, Cross, & Noland, 1992; Lieberman, 1992). One hotel chain spent over $1 million in implementing a yield management system, only to discontinue using the system because it was not appropriate for their properties. One airline attributed losses in excess of $10 million due to errors in its yield management models. The main objectives of this research are to: (1) develop modified heuristics for the hotel operating environment, (2) test and compare five heuristics, and (3) help hotel managers select the appropriate reservation control heuristic that best suits their operating environment. These heuristics are tested under the most realistic hotel-specific operating conditions to date. For example, the operating environments in this research include the following realistic characteristics: (1) room demand modeled as a Poisson process with varying demand intensities and timing, (2) daily cancellation rates for the demand that is accepted, (3) no-show rates, (4) errors in...
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