lect23 - MIT MIT ICAT ICAT Pricing Challenges: ePODS and...

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MIT MIT ICAT ICAT 1 Pricing Challenges: ePODS and Reality Dr. Peter P. Belobaba 16.75J/1.234J Airline Management May 8, 2006
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MIT MIT ICAT ICAT 2 PODS: Passenger Choice of Path/Fare y Given passenger type, randomly pick for each passenger generated: ± Maximum “out-of-pocket” willingness to pay ± Disutility costs of fare restrictions ± Additional disutility costs associated with “re-planning” and path quality (stop/connect) costs y Screen out paths with fares greater than this passenger’s WTP. y Assign passenger to feasible (remaining) path/fare with lowest total cost.
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MIT MIT ICAT ICAT 3 Willingness to Pay (WTP) ] * ) 1 ( ) ( * ) 2 log( , 1 min[ ) least at pay ( y Probabilit basefare emult basefare f e f = With: basefare = Q fare for leisure passengers = 2.5 * Q fare for business passengers And: emult implies • approx 20% of leisure passengers will pay higher fare • most business passengers will pay Y fare if necessary
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MIT MIT ICAT ICAT 4 E-PODS Baseline Fare Structure Fare Code Price Level Advance Purchase Sat. Night Min. Stay Non- Refundable Change Fee Y $350 -- -- -- -- M $200 7 day Yes -- -- B $150 14 day Yes Yes -- Q $100 21 day Yes Yes Yes
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MIT MIT ICAT ICAT 5 Fare Class Restriction Disutilities y Disutility costs associated with the restrictions of each fare class are added to the fare value to determine the choice sequence of a given passenger among the classes with fare values less than his/her WTP. y The restrictions are: ± R1: Saturday night stay (for M, B and Q classes), ± R2: cancellation/change penalty (for B and Q classes), ± R3: non-refundability (for Q class).
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MIT MIT ICAT ICAT 6 Fare Restriction Disutilities y These coefficients have been “tuned” with structured fares so that on average* business and leisure passengers have respectively a Y/M/B/Q and a Q/B/M/Y choice sequence, as shown on the next two slides. y *The following slides represent the mean disutilities for an average passenger. The actual disutility value for an individual passenger is a random number taken from a normal distribution centered on the mean disutility value.
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MIT
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This note was uploaded on 11/08/2011 for the course AERO 16.72 taught by Professor Hansman during the Fall '06 term at MIT.

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lect23 - MIT MIT ICAT ICAT Pricing Challenges: ePODS and...

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