AMERICAN VERSUS NORTHWEST IN YIELD MANAGEMENT An example of resource mobility

AMERICAN VERSUS NORTHWEST IN YIELD MANAGEMENT An example of resource mobility

An example of resource mobility arose in a lawsuit involving American Airlines and Northwest Airlines. The case centered on an allegation that Northwest Airlines stole valuable information related to American’s yield management capabilities. Yield management refers to a set of practices designed to maximize an airline’s yield— the dollars of revenue it collects per seat-mile it flies. Yield management techniques combine mathematical optimization models with forecasting techniques to help an airline determine fares, fix the number of seats it should sell in various fare categories, and adjust its inventory of seats in response to the changes in demand conditions. American Airlines has the most sophisticated yield management capabilities in the airline industry. At the time of the lawsuit in the early 1990s, American’s system was thought to have added $300 million to American’s annual revenues. By contrast, Northwest’s yield management capabilities were below average. In the late 1980s, it hired a consultant to devise a mathematical model to underpin a new system. But management soon became skeptical of the consultant’s efforts. The system the consultant devised was estimated to cost $30 million, but its success was uncertain. In 1990, Northwest fired the consultant. Northwest then tried to purchase a yield management system from American. However, in return for the system, American demanded Northwest’s operating right to fly between Chicago and Tokyo, a route whose market value was estimated at between $300 million and $500 million. Northwest refused to trade. Instead, in the fall of 1990, Northwest hired John Garel, the chief of the yield management department at American. Garel then tried to lure American’s best yield managers to Northwest. Out of the 38 new yield management employees hired by Northwest in 1990, 17 came from American, often with generous raises of 50 to 100 percent. Along with hiring many of American’s yield managers, Northwest also managed to acquire a diskette containing American’s “spill” tables, which are a key part of mathematical models used to plan the acquisition of new aircraft. Northwest had tried to purchase the spill tables along with American’s yield management system in 1990. American alleged that one of its former employees recruited by Northwest copied the diskette. Northwest also obtained internal American documents on how to improve a yield management system. One of the documents was entitled “Seminar on Demand Forecasting,” which Northwest used to vastly improve its system called AIMS. American alleged that its system contains five critical techniques, all of which Northwest copied. One Northwest yield manager characterized the revision as “a heart transplant of the AIMS system.” In 1993, American sued Northwest in federal court. It sought to bar Northwest from using its revised yield management system and $50 million in damages. American also brought a suit against KLM, the Dutch airline that is Northwest’s international marketing partner. According to American, Northwest passed along the internal American documents to KLM. This example illustrates that the resources that are the basis of competitive advantage can be highly mobile. This is especially true when those resources are talented individuals, but is also true when the resource is information, a technique, or a formula that can be written down and copied. It is also noteworthy that Northwest was unable to capture all of the extra value that it hoped to obtain by hiring the American yield managers. Some of it had to be shared with these individuals by paying them higher salaries. This highlights a general point about competitive markets. When a scarce resource is fully mobile and is as valuable to one firm as to another, the extra profit that the firms can earn from the resource will be competed away as they bid against one another to acquire it.

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