MIT1_201JF08_lec17

MIT1_201JF08_lec17 - M I T I n t e r n M I T I n t e r n a...

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Unformatted text preview: M I T I n t e r n M I T I n t e r n a t i o n a t i o n a l a l C e n t e r f o C e n t e r f o r A r A i r T i r T r a n s p o r a n s p o r t a t i o r t a t i o n n MIT MIT ICAT ICAT Airline Revenue Management: Flight Leg and Network Optimization 1.201 Transportation Systems Analysis: Demand & Economics Dr. Peter P. Belobaba MIT MIT ICAT ICAT 2 Lecture Outline 1. Overview of Airline Pricing Differential Pricing Theory Fare Restrictions and Disutility 2. Revenue Management Systems 3. Overbooking Models 4. Single-leg Fare Class Seat Allocation Problem EMSRb Model for Seat Protection 5. Network Revenue Management Origin-Destination Control Mechanisms Network Optimization Methods MIT MIT ICAT ICAT 3 Differential Pricing Theory Market segments with different willingness to pay for air travel Different fare products offered to business versus leisure travelers Prevent diversion by setting restrictions on lower fare products and limiting seats available Increased revenues and higher load factors than any single fare strategy MIT MIT ICAT ICAT 4 Traditional Approach: Restrictions on Lower Fares Progressively more severe restrictions on low fare products designed to prevent diversion: Lowest fares have advance purchase and minimum stay requirements , as well as cancellation and change fees Restrictions increase the inconvenience or disutility cost of low fares to travelers with high WTP, forcing them to pay more Studies show Saturday night minimum stay condition to be most effective in keeping business travelers from purchasing low fares Still, it is impossible to achieve perfect segmentation: Some travelers with high WTP can meet restrictions Many business travelers often purchase restricted fares MIT MIT ICAT ICAT 5 Restrictions Help to Segment Demand Fare Code Dollar Price Advance Purchase Round Trip? Sat. Night Min. Stay Percent Non- Refundable Y $400 -- -- -- -- B $200 7 day Yes -- 50 % M $150 14 day Yes Yes 100 % Q $100 21 day Yes Yes 100 % Business passengers unwilling to stay over Saturday night will not buy M or Q. RM system protects for Y, B demand but keeps M,Q classes open without losing revenue. MIT MIT ICAT ICAT 6 Example: Restriction Disutility Costs MIT MIT ICAT ICAT 7 BOS-SEA Fare Structure American Airlines, October 1, 2001 Roundtrip Fare ($) Cls Advance Purchase Minimum Stay Change Fee? Comment 458 N 21 days Sat. Night Yes Tue/Wed/Sat 707 M 21 days Sat. Night Yes Tue/Wed 760 M 21 days Sat. Night Yes Thu-Mon 927 H 14 days Sat. Night Yes Tue/Wed 1001 H 14 days Sat. Night Yes Thu-Mon 2083 B 3 days none No 2 X OW Fare 2262 Y none none No 2 X OW Fare 2783 F none none No First Class MIT MIT ICAT ICAT 8 Yield Management = Revenue Management YM assumes a set of differentiated fare classes and available flight capacity as given : Forecast future booking demand for each fare product Optimize number of seats to be made available to each fare class...
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MIT1_201JF08_lec17 - M I T I n t e r n M I T I n t e r n a...

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