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AirlineRevenueManagement:AnOverviewofORTechniques1982-2001KevinPak*NandaPiersma†January,2002EconometricInstituteReportEI2002-03AbstractWiththeincreasinginterestindecisionsupportsystemsandthecontinuousadvanceofcomputerscience,revenuemanagementisadisciplinewhichhasreceivedagreatdealofinterestinrecentyears.Althoughrevenuemanagementhasseenmanynewapplicationsthroughouttheyears,themainfocusofresearchcontinuestobetheairlineindustry.EversinceLittlewood(1972)firstproposedasolutionmethodfortheairlinerevenuemanagementproblem,avarietyofsolutionmethodshavebeenintroduced.Inthispaperwewillgiveanoverviewofthesolutionmethodspresentedthroughouttheliterature.Keywords:RevenueManagement,SeatInventoryControl,ORtechniques*ErasmusResearchInstituteofManagementandEconometricInstitute,ErasmusUniversityRotterdam,TheNetherlands†EconometricInstitute,ErasmusUniversityRotterdam,TheNetherlands11.Introduction1.1.RevenueManagementCompaniessellingperishablegoodsorservicesoftenfacetheproblemofsellingafixedcapacityofaproductoverafinitehorizon.Ifthemarketischaracterizedbycustomerswillingtopaydifferentpricesfortheproduct,itisoftenpossibletotargetdifferentcustomersegmentsbytheuseofproductdifferentiation.Thiscreatestheopportunitytoselltheproducttodifferentcustomersegmentsfordifferentprices,e.g.chargingdifferentpricesatdifferentpointsintimeorofferingahigherservicelevelforahigherprice.Inordertodoso,decisionswillhavetobemadeaboutthepricestochargeandthenumberofproductstoreserveforeachcustomersegment.Makingthiskindofdecisionsisthetopicofrevenuemanagement.Revenuemanagementcanbedefinedastheartofmaximizingprofitgeneratedfromalimitedcapacityofaproductoverafinitehorizonbysellingeachproducttotherightcustomerattherighttimefortherightprice.Itencompassespracticessuchasprice-discriminationandturningdowncustomersinanticipationofother,moreprofitablecustomers.Revenuemanagementoriginatesfromtheairlineindustry,wherederegulationofthefaresinthe1970'sledtoheavycompetitionandtheopportunitiesforrevenuemanagementschemeswereacknowledgedinanearlystage.Theairlinerevenuemanagementproblemhasreceivedalotofattentionthroughouttheyearsandcontinuestobeofinteresttothisday.Otherapplicationsofrevenuemanagementcanbefoundinthehotel,carrental,railwayandcruise-lineindustriesamongothers.Thepossibleapplicationsofrevenuemanagementgobeyondthetouristindustries,though.Theenergyandtelevisionbroadcastindustrieshavebeenmentionedaspossibleapplicationsandithasbeenarguedthattheconceptofrevenuemanagementcanevenbeappliedtofastmovingconsumergoodsinsupermarkets.1.2.AirlineRevenueManagementAnairline,typically,offersticketsformanyorigin-destinationitinerariesinvariousfareclasses.Thesefareclassesnotonlyincludebusinessandeconomyclass,which2aresettledinseparatepartsoftheplane,butalsoincludefareclassesforwhichthedifferenceinfaresisexplainedbydifferentconditionsfore.g.cancellationoptionsorovernightstayarrangements.Thereforetheseatsonaflightareproductswhichcanbeofferedtodifferentcustomersegmentsfordifferentprices.Sincetheticketsforaflighthavetobesoldbeforetheplanetakesoff,theproductisperishableandrevenuemanagementcanbeapplied.Attheheartofairlinerevenuemanagementliestheseatinventorycontrolproblem.Thisproblemconcernstheallocationofthefiniteseatinventorytothedemandthatoccursovertimebeforetheflightisscheduledtodepart.Theobjectiveistofindtherightcombinationofpassengersontheflightssuchthatrevenuesaremaximized.Theoptimalallocationoftheseatinventorythenhastobetranslatedintoabookingcontrolpolicy,whichdetermineswhetherornottoacceptabookingrequestwhenitarrives.Itispossiblethatatacertainpointintimeitismoreprofitabletorejectabookingrequestinordertobeabletoacceptabookingrequestofanotherpassengeratalaterpointintime.Otherimportanttopicsthathavereceivedattentionintherevenuemanagementliteraturearedemandforecasting,overbookingandpricing.Demandforecastingisofcriticalimportanceinairlinerevenuemanagementbecausebookingcontrolpoliciesmakeuseofdemandforecaststodeterminetheoptimalbookingcontrolstrategy.Ifanairlineusespoordemandestimates,thiswillresultinabookingcontrolstrategywhichperformsbadly.Airlinesoftenhavetocopewithno-shows,cancellationsanddeniedboardings.Therefore,inordertopreventaflightfromtakingoffwithvacantseats,airlinestendtooverbookaflight.Thismeansthattheairlinebooksmorepassengersonaflightthanthecapacityoftheplaneallows.Thelevelofoverbookingforeachtypeofpassengerhasbeenthetopicofresearchformanyyears.Pricingisobviouslyveryimportantfortherevenuesofanairlinecompany.Infact,pricedifferentiationisthestartingpointoftherevenuemanagementconcept.Demandforecasting,overbookingandpricingare,however,topicsbeyondthescopeofthispaper.ForanoverviewoftheliteratureonthesethreetopicswerefertoMcGillandVanRyzin(1999).32.SeatInventoryControlTheseatinventorycontrolprobleminairlinerevenuemanagementconcernstheallocationofthefiniteseatinventorytothedemandthatoccursovertime.Inordertodecidewhetherornottoacceptabookingrequest,theopportunitycostsoflosingtheseatstakenupbythebookinghavetobeevaluatedandcomparedtotherevenuegeneratedbyacceptingthebookingrequest.So