MIT1_201JF08_lec18

MIT1_201JF08_lec18 - MIT International MIT MIT ICAT Center...

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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 ICAT ICAT MIT MIT Airline Revenue Management: Impacts of Fare Simplification on RM Systems 1.201 Transportation Systems Analysis: Demand & Economics Dr. Peter P. Belobaba
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MIT MIT ICAT ICAT 2 Changing Fare Structures Worldwide Major shifts in airline pricing strategies since 2000 Growth of low-fare airlines with relatively unrestricted fares Matching by legacy carriers to protect market share and stimulate demand Increased consumer use of internet search engines to find lowest available fare options Greater consumer resistance to complex fare structures and huge differentials between highest and lowest fares offered Recent moves to “simplified” fares overlook the fact that pricing segmentation contributes to revenues: Fare simplification removes restrictions, resulting in reduced segmentation of demand
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MIT MIT ICAT ICAT 3 Fare Simplification Reduces Segmentation Fare Code Dollar Price Advance Purchase Round Trip? Sat. Night Min. Stay Percent Non- Refundable Y $500 -- -- -- -- B $375 7 day -- -- 50 % M $250 14 day -- -- 100 % Q $190 21 day -- -- 100 % With fewer restrictions on lower fares, some Y (business) passengers are able to buy B, M and Q. Keeping B, M, Q classes open results in “spiral down” of high fare passengers and total revenues.
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MIT MIT ICAT ICAT 4 BOS-SEA Fare Structure American Airlines, October 1, 2001 Roundtrip Fare ($) Cls Advance Purchase Minimum Stay Change Fee? Comment 458 N 21 days Sat. Night Yes Tue/Wed/Sat 707 M Tue/Wed 760 M 21 days Sat. Night Thu-Mon 927 H 14 days 1001 H 14 days Sat. Night 2083 B 3 days none No 2 X OW Fare 2262 Y 2783 F First Class
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MIT MIT ICAT ICAT 5 BOS-SEA Simplified Fare Structure Alaska Airlines, May 1, 2004 Roundtrip Fare ($) Cls Advance Purchase Minimum Stay Change Fee? Comment 374 V 21 days 1 day Yes Non-refundable 456 L 14 days 559 Q 683 H 7 days 827 B 3 days none No 2 X OW Fare 929 Y 1135 F First Class
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MIT MIT ICAT ICAT 6 In Retrospect, the Airline RM Problem was Relatively Simple Fundamental assumptions of traditional RM models: Multiple fare levels offered on same flight, same itinerary Each has different restrictions and characteristics Demand for each fare class is independent and identifiable Passengers will only buy their preferred fare product Implications for forecasting: Future demand can be predicted based on historical bookings in each fare class Time series statistical methods used by most RM systems Implications for optimization: Given independent demand forecasts and remaining capacity, optimize booking limits for each fare class by flight or network
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MIT MIT ICAT ICAT 7 “Spiral-Down” in Traditional RM Systems Simplified fare structures characterized by One-way fares with little or no product differentiation, priced at different fare levels Without segmentation, passengers buy the lowest available fare Fare class forecasts based on historical bookings
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This note was uploaded on 12/04/2011 for the course ESD 1.210j taught by Professor Mosheben-akiva during the Fall '08 term at MIT.

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MIT1_201JF08_lec18 - MIT International MIT MIT ICAT Center...

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