Book Review Published in Transportation Journal Winter 2008

 

The Future of Pricing

How Airline Ticket Pricing Has Inspired a Revolution

By E.Andrew Boyd

Palgrave MacMillan

New York, NY

November 2007, pp 192, $45.00

ISBN-13: 978-0-230-60019-5

ISBN-10: 0-230-60019-0

 

 

 

Written by a leading authority on pricing, The Future of Pricing presents a view of airline pricing practices from the inside. The author’s stated goal is to teach using interviews, examples, history, and personal experience. This approach helps to make his book readable and Dr. Boyd does accomplish his goal of teaching the basics of the science of pricing to the average reader. The stories used as examples range from Socrates to Las Vegas casinos. While interesting, these anecdotes often do not seem relevant to the subject matter.

 

After providing background about airline pricing in Chapter 1, the author clearly explains yield management and introduces the concept of perishability of airline seats in Chapter 2. This is followed by clear descriptions of the long haul, hub and spoke systems of the legacy carriers and the shorter haul, point to point operations of the low cost carriers.

 

Chapter 3 is one of the most interesting and informative in the book. It examines the evolution of airline reservations systems from manual booking to card and chalkboard systems, followed by mechanical systems and present day computerization. As reservations systems evolved, airlines learned to use them as a competitive advantage. Travel agents and airlines also began the practice of co-hosting, or shared displays on reservations systems. Anecdotes in this chapter show how management practices and airline inefficiencies have often led to dilution of revenue. This created the need, after deregulation, for passive reservations booking groups to morph into sales teams.

 

Chapters 4 and 5 are dense and mathematical but do illustrate the big challenges faced by airlines. The main points are that it is difficult to convert reservations systems from inventory management; filling seats, to revenue management; maximizing yield. This is further complicated by uncertainty of demand and high costs of airline infrastructure. Some examples of pricing terminology in this section include nested fares, pseudo fares, and fare class buckets.

 

Chapter 6, “Hold Me, Darlin”, continues the discussion of demand forecasting by using lengthy examples of card playing strategies. The author is enthusiastic about poker and blackjack but the connection to scientific pricing is not made clear. The chapter describes four forecasting concepts: Unconstraining, Buy-down, Competitive Price Data, and Consumer Choice.

 

The applications of revenue management in the hotel, car rental, and cruise ship industries are explored in Chapter 7. The examples used here do reflect the travel experiences of the average reader, making this chapter especially effective in communicating the effect of scientific pricing on revenue management. The business problems of these travel companies are similar to those of airlines. All face the pressures of perishable inventory. Competition for market share demands that revenue management not necessarily result in price increases.

 

In Chapter 8, the author invokes Aristotle and Socrates to introduce the concept of “just pricing”. Oil company profits, along with rapidly changing fuel prices, are widely seen as unjust. Airline fares are associated with miles flown by the average consumer. Actual costs, however, are the result of both high fixed costs and uncertainty of demand. This makes it difficult to establish what a fair and reasonable price should be for any particular flight. Accounting based pricing attempts to recover costs plus some profit, while science based pricing charges according to demand and willingness to pay. A big issue for companies using science based pricing is that they run the risk of offending the sense of justice of their customers. Frequently changing prices takes away our idea of a just or reasonable fare.

 

Chapter 9, “The Scientists”, consists of a rather uninteresting story about some of the major players in the world of scientific pricing. Dr. Boyd emphasizes that the point of operations research in business is to increase profits. This may be anathema to those “pure” scientists who wish to do research for its own sake. This view, according to Boyd, hinders the growth of scientific pricing due to the researchers’ unwillingness or inability to communicate the science in business terms. Chapter 10 provides examples of pricing done by the seat of the pants in some industries.

 

Chapter 11 is intended to illustrate how pricing is slowly evolving through the use of science. It includes a lengthy anecdote about contract pricing in health care and is supported by graphs. I found this chapter confusing and difficult to connect to the topic of airline pricing. The book concludes with Chapter 12, making a strong case for customer centric pricing as the way of the future.

 

This book will certainly be of value to pricing professionals in airlines and other industries. However, I would be reluctant to recommend it to the average reader or airline passenger.

 

 

 

 

Mitch Kostoulakos, CTL

Adjunct Instructor- Supply Chain

Northern EssexCommunity College

Haverhill, MA01835

 

 

Book Review Published in Transportation Journal Summer 2005

Wedding of the Waters, by Peter L. Bernstein.

W.W. Norton and Co, 2005

ISBN 0-393-05233-8

Most readers understand why economics is known as the “dismal science” and few would be drawn to a story about a 19^th Century canal. Peter L. Bernstein is an economist who has written a book about the Erie Canal which is both informative and interesting.

Wedding of the Waters examines the genesis, construction, financing, and operation of the waterway which would change the nature of commerce in the United States. Most importantly, the author establishes clear links for today’s policy makers between the Canal project and 21^st Century infrastructure issues. Money, politics, and technology are the themes used by Bernstein in telling the story. In fact, by changing names and dates, this could be a contemporary story.

The book is divided into five parts, each consisting of four or five chapters.  Part I, “The Visionaries” traces the background of the canal era. The MidiCanal in France and the Bridgewater in Britain are described as marvels of technology for their time. For example, while Britain was blessed with deep water ports for ocean trade, inland transportation was primitive. The BridgewaterCanal enabled faster, easier transport of coal from the mining regions to Manchester resulting in a 50% drop in the price of the fuel. Part I  also provides a fascinating view of George Washington as shrewd businessman using leadership and surveying skills to promote his beloved Potomac River as the major east-west artery in America. Washington feared that the formidable Appalachian mountain range would disrupt national unity without a good transportation link between the Atlantic seaboard and the then western colonies. The political climate and form of government of the time required that the Potomac project be a private enterprise and it ultimately failed.

Politics and war are the subjects of Part II, “The Action Begins”. A $3 Million surplus in 1804 provided the opportunity for improvements in infrastructure, specifically roads and canals. Secretary of the Treasury Albert Gallatin promoted the idea of improved transportation as an instrument of economic development. He predicted to Congress that increasing the volume of goods able to be traded between the states would result in greater national wealth at a time when the U.S. was just starting to become a nation. Gallatin’s report established early justification for public financing of infrastructure projects, opening the way for the Erie Canal. These chapters provide clear parallels with the U.S. of today. Then, as now, foreign policy intervened to reduce domestic spending. The surplus became a deficit as the military budget increased due to the impending War of 1812.  President Thomas Jefferson appeared indifferent to the Erie Canal project and his political opponents charged him with favoring the Potomac route. East- west unity of the former colonies was deemed critical to the survival of the new nation. Finally, Part II includes a good description of the scope of the Erie Canal project.  The plan was for a 363 mile canal over difficult topography, in a country with no other canals longer than 50 miles, and where civil engineering was not yet a profession. The contrast between bickering politicians and competent engineers is striking.

Part III, “The Creation”, describes the construction of the Erie Canal. Technological advances included workers’ inventions for clearing stumps and moving earth. Waterproof limestone was developed outside of Syracuse and an important new American industry was born. During construction the nation undergoes an economic cycle which compares with the internet boom of the 1990’s, followed by a predictable bust.  The boom and bust cycle would complicate the financing of the Erie Canal requiring New YorkState politicians to take action.   The driving forces of the project were NY politicians DeWitt Clinton and Gouveneur Morris. Their personal stories are woven throughout the book, as is the rivalry between Aaron Burr and Alexander Hamilton.

In Part IV “The Stupendous Path”, the Erie Canal is completed, setting off massive celebrations and worldwide publicity. A trip on the Erie Canal was the ultimate adventure ride in the pre- Disney United States.

The success of the Canal becomes immediately apparent in Part V, “After the Wedding”. Traffic grew to 7000 boats in 1826. Toll revenues were $500,000 which was five times the interest on Canal bonds. The entire debt was paid by 1887, and the greatly reduced freight rates made more goods available to more Americans.  Quality of life issues arose as industrialization took hold in America while greater personal mobility disrupted societal norms traditionally centered on farm and family.  These changes coincided with the 2^nd Great Awakening wave of revisionism and evangelism. There was some persecution of Catholic immigrants now coming into areas previously closed to them and led by Canal laborers. Readers may find similarities with today’s post- industrial and increasingly religious America.

It is no exaggeration to say that the Erie Canal transformed New York into the Empire State. By the mid 1800’s telegraph lines had sprung up along the path of the Canal and along railroad lines. The collapsing effect of time and distance on the 19^th Century economy was as dramatic as the effect of air freight and the internet is on contemporary commerce.  The Canal helped to change the primary U.S. axis from north-south to east-west. The economic power of cotton- producing slave states gave way to free- labor industrial states. As new mid- west cities developed, farming moved further west and became a profit making enterprise. The goal of uniting the U.S from east to west was achieved.  The 1800’s economic transformation of the U.S. had even further reaching consequences. Drastically reduced costs of transportation from the mid-west to the Port of  New York opened European markets to American grain. Sped by European crop failures and the repeal of British “Corn Laws”, the United States became the granary of the world. The Erie Canal, an ambitious technical and financial undertaking that was conceived to help unite a fragile new nation, eventually led the way to what we know as globalization.

Mitch Kostoulakos, CTL

Book Review Published in Transportation Journal Fall 2003

 

Supply Chain Logistics Management, 1^st edition, by Donald J. Bowersox, David J. Closs, and M. Bixby Cooper, McGraw Hill/Irwin, 1221 Avenue of the Americas, New York, NY 10020, 2002. Pp. 656. ISBN 0-07-235100-5

 

 

Written by three well-respected authors in the field of logistics, this text is a valuable addition to the supply chain literature. Readers will find that the textbook moves quickly beyond the basics of logistics management to more challenging topics such as financial sophistication and enterprise extension. The emphasis is clearly on higher level, “integrated” logistics. This viewpoint, along with the many practical tools presented for implementation, make this book suitable for use in advanced level logistics courses.

 

The authors’ stated objectives are: 1) a comprehensive description of existing logistics in a global environment; 2) describe ways and means to apply logistics principles to achieve competitive advantage; 3) provide a conceptual approach for integrating logistics as a core competency in enterprise strategy.

 

The book is divided into five parts, each leading logically to the next.  Part I covers six chapters which thoroughly discuss common logistics subjects from order processing and customer service to marketing and procurement functions. Chapter 2 introduces the concepts of “lean logistics” and lowest total cost movement and positioning of inventory. Chapter 6 forms the foundation for later discussion of operational integration both within the firm and with business partners.

 

Technology is the focus of Part II, Chapters 7 through 9. These chapters illustrate the value of this text in several ways. First, the information is presented with minimal use of jargon and in non-technical terms. Next, the clear descriptions of information networks in Chapter 7 are a welcome change from some logistics volumes which assume technical sophistication on the part of the reader. The enterprise planning and scheduling covered in Chapters 8 and 9 include operational benefits to be gained from improvements in technology. This is important in gaining the “buy in” of the total cost concept from manufacturing, distribution, marketing, and especially finance managers. Table 8-2 provides a good summary of operations systems functionality.

 

Part III, Operations, includes Chapters 10 through 14. The reader finds a good overview of Inventory Management, Transportation Infrastructure and Regulation, Transportation Management, Warehousing, and Packaging and Materials Handling. There are no surprises in this section except that Chapter 12, Transportation Management, seems brief considering the impact of transportation on total logistics costs.

 

Network Design, Part IV, is what makes this book most useful for advanced study in supply chain and logistics management. These two chapters go a long way toward the authors’ goal of integrating logistics as a core competency. Further, the discussions presented can help the logistics professional participate in high level strategic planning. Chapter 15, Network Integration illustrates the higher-level extension of the firm’s network to supply chain partners. This is followed by clear descriptions of location theory and warehouse cost basis justification. Chapter 16, Design Process and Techniques outlines the methodology used in logistics planning. These include well-designed tables of sample internal and external review topics as well as a typical technology assessment.

 

The final section of the text is Part V, Administration. Chapter 18, Performance and Financial Assessment, is the most interesting and useful of these chapters. Table 18-1 is a concise outline of typical performance metrics. The discussions of asset management and financial budgeting will help the logistics professional participate in strategic policy.

 

For the instructor, this textbook provides sets of problems and the ends of Parts II and III. These problems make good weekly assignments or material for classroom discussions. Longer cases are included at the end of the text for Parts I, IV, and V. Because of their length, these cases would be best used as semester length projects.

 

The authors have included many figures and tables throughout the book. A number of these tables, as noted above, will make good reference material. Many of the figures, however, seem to have less relevance.

 

Overall, Supply Chain Logistics Management, makes a solid addition to the bookshelf of the student or logistics professional. The authors have certainly achieved their objectives and they have written a useful textbook.

 

 

 

Mitchell G. Kostoulakos, MBA, CTL

Adjunct Lecturer in Transportation

Northeastern University

University College

Boston, MA 02115