A Competitive Approach To Airline Revenue Management

Since the 1980s, the airline industry has seen two major changes: Deregulation, which led to an increase in competition, and the development of revenue management systems. Paradoxically the revenue management models used have not incorporated many competitive considerations. In this thesis we study the interactions between existing airline revenue management systems in competitive markets. We use the Passenger Origin Destination Simulator (PODS) for simulations. After a review of the past research on such interactions, we develop our own model and use simulations to identify and measure the extent to which revenue management systems of competing airlines affect each other. The model introduced highlights the importance of spill-of-demand between airlines. We show that with current revenue management practice, a legacy carrier should be less sensitive than a low-cost carrier to revenue management competitive interactions. As compared to an equivalent monopoly, an airline oligopoly tends to allocate more seats to high-fare passengers and fewer seats to low-fare passengers. With steady demand distributions, an airline's expected revenues are a decreasing function of the seat capacity allocated by its competitors to high-fare passengers. Existing revenue management systems react to competitor moves automatically only if a change in the seat allocation rule by an airline occurs over a large enough number of successive departures to be detected by forecasters. We then suggest how to improve revenue management based on the interactions identified. With steady demands, if a competitor increases (respectively decreases) its seat allocation for high-fare passengers, the best response to optimize revenues on the short-term is to decrease (respectively increase) seat allocation for high-fare passengers. We also show that the use of EMSRb-optimization by competitors results in a near-optimum competitive equilibrium, and a near-optimum cooperative equilibrium if airlines do not share revenues. Rarely can competitive interactions justify an airline to override the EMSRb seat-allocation rule to optimize revenues. Last, we introduce LOCO-based Forecast Multiplication, a heuristic forecast adjustment made in response to the current seat availability of the competitors that can increase an airline's revenues substantially.

Pricing is about deciding your market position whereas revenue management is the strategic and tactical decisions firms take in order to optimize revenues and profits. This book offers insights into research, theories, applications and innovations and how to makes these work in different industries.

The book provides a comprehensive overview of current practices and future directions in airline revenue management. It explains state-of-the-art revenue management approaches and outlines how these will be augmented and enhanced through modern data science and machine learning methods in the future. Several practical examples and applications will make the reader familiar with the relevance of the corresponding ideas and concepts for an airline commercial organization. The book is ideal for both students in the field of airline and tourism management as well as for practitioners and industry experts seeking to refresh their knowledge about current and future revenue management approaches, as well as to get an introductory understanding of data science and machine learning methods. Each chapter closes with a checkpoint, allowing the reader to deepen the understanding of the contents covered.This textbook has been recommended and developed for university courses in Germany, Austria and Switzerland.

This book chronicles airline revenue management from its early origins to the last frontier. Since its inception revenue management has now become an integral part of the airline business process for competitive advantage. The field has progressed from inventory control of the base fare, to managing bundles of base fare and air ancillaries, to the precise inventory control at the individual seat level. The author provides an end-to-end view of pricing and revenue management in the airline industry covering airline pricing, advances in revenue management, availability, and air shopping, offer management and product distribution, agency revenue management, impact of revenue management across airline planning and operations, and emerging technologies is travel. The target audience of this book is practitioners who want to understand the basics and have an end-to-end view of revenue management.

The value of revenue management to the airlines has been amply demonstrated, both by industry experience and in simulation studies of the reservation process. However, there have been no attempts to determine if the benefits of seat inventory control are specific to the competitive market setting in which it is instituted. Furthermore, previous theoretical research has not considered whether interactions of the control methods of rival carriers may affect both the total revenue improvement attainable in the market and how these gains are shared by individual carriers. This thesis uses a modeling approach created by the Boeing Commercial Airplane Group to address these questions. The Passenger Origin / Destination Simulator combines a demand model framework with a set of routines which implement the basic forecasting and inventory control functions of airline revenue management. The Boeing simulation system is implemented in the thesis through the development of a generic fare product structure, passenger behavioral attributes, and assumptions on demand composition. Within this Operational Competitive Simulation Environment, the effect of competition on the value of revenue management is explored in simulation experiments with three classes of scenarios. In these scenarios, the gains from leg-based inventory control are assessed under varying competitive conditions, including the magnitude and distribution of passenger demand, carrier frequency share, relative departure timing, and route network design. From the simulation results, it is apparent first that inventory control innovation always improves carrier and aggregate market revenues-competition along the dimension of revenue management is not a zero-sum game from the carriers' perspective. A signal contribution of the experimental research has been the finding that the revenue dividend from inventory control derives largely from the sale of higher-yield fare products to leisure and discretionary business passengers, and only marginally at the expense of those carriers with a less advanced control capability. Additionally, the relative changes in revenue due to different control methods are indeed influenced by other competitive forces operative in the market.

The current practice of revenue management is either quantity based or price based. A quantity based revenue management is most commonly observed in the airline industry; whereas a price based revenue management is practiced in retail enterprises. Recent improvement of information technology has not only increased the market size, but also has increased market competition. In a competitive environment customers choose among substitutable products depending on several rationalities, however a paramount factor in most selections is price. This thesis investigates pricing issue in revenue management and makes three contributions. First, price based revenue management is studied in the airline industry in a competitive market. Airlines compete for customers using their fare pricing strategies while having fixed capacity allocated in each fare class. The demand for each fare class of an airline is dependent on its fare price and the fare price offered by rival airline(s). A game theoretic approach is used to address the problem assuming both the deterministic and stochastic price sensitive customer demand for each fare class. The existence and uniqueness of Nash equilibrium for the game is shown for both deterministic and stochastic demands. A sensitivity analysis is carried out to determine fare pricing in each fare class considering various situations in the case of deterministic demand. The analysis is further extended to stochastic price sensitive demand, and a sensitivity analysis of the fare prices for each fare class is also reported. Second, an integrated approach to price and quantity based revenue management with an application to the airline industry is presented. The models proposed enable joint control of fare pricing and seat allocation in a duopoly competitive market. Both non cooperative and cooperative bargaining games are studied. Numerical experimentation is performed to study both competitive and cooperative fare pricing along with seat inventory control assuming a nested control on booking limits. In the case of a non cooperative game, Nash equilibrium for the competing airlines is determined assuming both symmetric and asymmetric market competition. A sensitivity analysis based on a statistical design of experiments is also presented to study the behavior of the game. Statistical evidence is established which shows that cooperation improves the revenue to the competing airlines. Lastly, a distribution free approach for pricing in revenue management is explored. The approach assumes the worst possible demand distribution and optimizes the lower bound estimate on revenue, while jointly controlling the price and capacity. The approach is first addressed to revenue management's most commonly observed standard newsvendor problem. Extensions to the problem are identified which can be applied to airline industry. Later the analysis is extended to consider the following cases: a shortage cost penalty; a holding and shortage cost; a recourse cost, with a second purchasing opportunity; and the case of random yields. An application of the approach is also suggested to capacity constrained industries facing restrictions such as limited budget. A numerical study reveals that the approach results in a near optimal estimate on revenue. Using a statistical comparison it is also shown that the outcomes of the standard newsvendor problem are significantly different than its extensions.

“There is no strategic investment that has a higher return than investing in good pricing, and the text by Gallego and Topaloghu provides the best technical treatment of pricing strategy and tactics available.” Preston McAfee, the J. Stanley Johnson Professor, California Institute of Technology and Chief Economist and Corp VP, Microsoft. “The book by Gallego and Topaloglu provides a fresh, up-to-date and in depth treatment of revenue management and pricing. It fills an important gap as it covers not only traditional revenue management topics also new and important topics such as revenue management under customer choice as well as pricing under competition and online learning. The book can be used for different audiences that range from advanced undergraduate students to masters and PhD students. It provides an in-depth treatment covering recent state of the art topics in an interesting and innovative way. I highly recommend it." Professor Georgia Perakis, the William F. Pounds Professor of Operations Research and Operations Management at the Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts. “This book is an important and timely addition to the pricing analytics literature by two authors who have made major contributions to the field. It covers traditional revenue management as well as assortment optimization and dynamic pricing. The comprehensive treatment of choice models in each application is particularly welcome. It is mathematically rigorous but accessible to students at the advanced undergraduate or graduate levels with a rich set of exercises at the end of each chapter. This book is highly recommended for Masters or PhD level courses on the topic and is a necessity for researchers with an interest in the field.” Robert L. Phillips, Director of Pricing Research at Amazon “At last, a serious and comprehensive treatment of modern revenue management and assortment optimization integrated with choice modeling. In this book, Gallego and Topaloglu provide the underlying model derivations together with a wide range of applications and examples; all of these facets will better equip students for handling real-world problems. For mathematically inclined researchers and practitioners, it will doubtless prove to be thought-provoking and an invaluable reference.” Richard Ratliff, Research Scientist at Sabre “This book, written by two of the leading researchers in the area, brings together in one place most of the recent research on revenue management and pricing analytics. New industries (ride sharing, cloud computing, restaurants) and new developments in the airline and hotel industries make this book very timely and relevant, and will serve as a critical reference for researchers.” Professor Kalyan Talluri, the Munjal Chair in Global Business and Operations, Imperial College, London, UK.

This is the first comprehensive introduction to the concepts, theories, and applications of pricing and revenue optimization. From the initial success of "yield management" in the commercial airline industry down to more recent successes of markdown management and dynamic pricing, the application of mathematical analysis to optimize pricing has become increasingly important across many different industries. But, since pricing and revenue optimization has involved the use of sophisticated mathematical techniques, the topic has remained largely inaccessible to students and the typical manager. With methods proven in the MBA courses taught by the author at Columbia and Stanford Business Schools, this book presents the basic concepts of pricing and revenue optimization in a form accessible to MBA students, MS students, and advanced undergraduates. In addition, managers will find the practical approach to the issue of pricing and revenue optimization invaluable. Solutions to the end-of-chapter exercises are available to instructors who are using this book in their courses. For access to the solutions manual, please contact [email protected].

From the man the Wall Street Journal hailed as "the guru of Revenue Management" comes revolutionary ways to recover from the after effects of downsizing and refocus your business on growth. Whatever happened to growth? In Revenue Management, Robert G. Cross answers this question with his ground-breaking approach to revitalizing businesses: focusing on the revenue side of the ledger instead of the cost side. The antithesis of slash-and-burn methods that left companies with empty profits and dissatisfied stockholders, Revenue Management overturns conventional thinking on marketing strategies and offers the key to initiating and sustaining growth. Using case studies from a variety of industries, small businesses, and nonprofit organizations, Cross describes no-tech, low-tech, and high-tech methods that managers can use to increase revenue without increasing products or promotions; predict consumer behavior; tap into new markets; and deliver products and services to customers effectively and efficiently. His proven tactics will help any business dramatically improve its bottom line by meeting the challenge of matching supply with demand.

This thesis also explores potential response strategies by the competing airlines. We discover that competitors can reverse the first-mover's revenue gain by modifying their fare structures while still using traditional RM methods. We conclude that although adopting segmented continuous pricing is promising in theory, its actual gains depend heavily on the competitive situation and the responses made by other airlines.