lect18 - MIT MIT ICAT Introduction to Revenue Management:...

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MIT ICAT MIT ICAT Introduction to Revenue Management: Flight Leg Revenue Optimization 16.75 Airline Management Dr. Peter P. Belobaba April 19, 2006
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MIT ICAT MIT ICAT Lecture Outline 1. Airline Revenue Maximization Pricing vs. Yield (Revenue) Management 2. Computerized RM Systems RM System in ePODS 3. Single-leg Fare Class Seat Allocation Problem Partitioned vs. Serial Nesting of Booking Classes Deterministic vs. Probabilistic Demand 4. EMSRb Model for Seat Protection Example of Calculations
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MIT ICAT MIT ICAT 1. Airline Revenue Maximization Two components of airline revenue maximization: Differential Pricing: Various “fare products” offered at different prices for travel in the same O-D market Yield Management (YM): Determines the number of seats to be made available to each “fare class” on a flight, by setting booking limits on low fare seats Typically, YM takes a set of differentiated prices/products and flight capacity as given: With high proportion of fixed operating costs for a committed flight schedule, revenue maximization to maximize profits
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MIT ICAT MIT ICAT Why Call it “Yield Management”? Main objective of YM is to protect seats for later- booking, high-fare business passengers. YM involves tactical control of airline’s seat inventory: But too much emphasis on yield (revenue per RPM) can lead to overly severe limits on low fares, and lower overall load factors Too many seats sold at lower fares will increase load factors but reduce yield, adversely affective total revenues Revenue maximization is proper goal: Requires proper balance of load factor and yield Many airlines now refer to “Revenue Management” (RM) instead of “Yield Management”
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MIT ICAT MIT ICAT Seat Inventory Control Approaches EXAMPLE: 2100 MILE FLIGHT LEG CAPACITY = 200 NUMBER OF SEATS SOLD : FARE CLASS AVERAGE REVENUE YIELD EMPHASIS REVENUE EMPHASIS LOAD FACTOR EMPHASIS Y B H V Q $420 $360 $230 $180 $120 20 23 22 30 15 10 13 14 55 68 17 23 19 37 40 TOTAL PASSENGERS LOAD FACTOR TOTAL REVENUE AVERAGE FARE YIELD (CENTS/RPM) 110 55% $28,940 $263 12.53 136 68% $31,250 $230 10.94 160 80% $30,160 $189 8.98
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MIT ICAT MIT ICAT Revenue Management Techniques Overbooking Accept reservations in excess of aircraft capacity to overcome loss of revenues due to passenger “no-show” effects Fare Class Mix (Flight Leg Optimization) Determine revenue-maximizing mix of seats available to each booking (fare) class on each flight departure Traffic Flow (O-D) Control (Network Optimization) Further distinguish between seats available to short-haul (one-leg) vs. long-haul (connecting) passengers, to maximize total network revenues Currently under development by some airlines
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MIT ICAT MIT ICAT 2. Computerized RM Systems Size and complexity of a typical airline’s seat inventory control problem requires a computerized RM system Consider a US Major airline with: 2000 flight legs per day 10 booking classes 300 days of bookings before departure At any point in time, this airline’s seat inventory
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lect18 - MIT MIT ICAT Introduction to Revenue Management:...

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