Revenue Management. Outline History Levels of Decisions. Net Contribution. Strategy Tactics

Transcription

1 Revenue Management Page 1 Outline History Levels of Decisions Strategy Tactics Net Contribution Prof. Metin Çakanyıldırım used various resources to prepare this document for teaching/training. To use this in your own course/training, please obtain permission from Prof. Çakanyıldırım. If you find any inaccuracies, please contact metin@utdallas.edu for corrections. Updated in Fall 216

2 Some U.S. airline industry observations Page 2 Since deregulation in 78, 137 carriers have filed for bankruptcy until 26. Over (the industry s best 5 years ever) airlines earned 3.5 cents on each dollar of sales: The US average for all industries is around 6 cents. Over 9-99 the industry earned 1 cent per $ of sales. Carriers typically fill 72.4% of seats while the break-even load is 7.4%. Utilization is about 3% higher in 27-8 perhaps due to flight cancellations. Gas prices vary. Downsize airlines Merge. Domestic/international» UnitedContinentalHoldings.com» AA+USAir Invest into alternative transportation modes» High speed train

3 Matching supply to demand when supply is fixed Page 3 Examples of fixed supply: Travel industries (fixed number of seats, rooms, rental cars, etc). Advertising time (limited number of time slots). Telecommunications bandwidth. Size of the MBA program. Doctor s availability for appointments. Revenue management is a solution: If adjusting supply is impossible adjust the demand! Segment customers into» High willingness to pay» Low willingness to pay. Limit the number of tickets sold at a low price,» i.e., control the average price by changing the mix of customers.

4 Environments suitable for revenue management Page 4 The same unit of capacity (e.g., airline seat) can be used to deliver services to different customer segments (e.g., business and leisure customers) at different prices. High gross margins (so the variable cost of additional sales is low). Perishable capacity (it cannot be stored) and limited capacity (all possible customers cannot always be served). Capacity is sold in advance of demand: Costly adjustment of sold capacity. There is an opportunity to segment customers (so that different prices can be charged) and different segments are willing to pay different prices. It is not illegal or morally irresponsible to discriminate the customers. Is revenue management for incoming MBA class possible?

5 History of Airline Travel in the USA Page 5 A phonograph cover This picture of manual reservation system is taken from Barry Smith s AGIFORS presentation. 195 s, 2% of Americans have ever flown on an airplane. 1964, Sabre (reservation system) became operational Flights used to feature good service, even live music by Professionals: At the beginning of his career Frank Sinatra is said to play on NYC-LA flights. Read in American Way Magazine of American Airlines but could not confirm independently. Passengers as in the picture on the right. Air travel was an exciting experience but now became a torture to be endured, except for some Southwest flights: See flight attendant M. Cobb

6 Published Fares Controlled by Civil Auronautics Board Deregulation in 1978 removed the restrictions on schedules and fares Page 6 This is from Barry Smith s AGIFORS presentation. Good Service & High Cost Then In 195s, OW (one way) ticket Dallas DC for $7. This corresponds to $7 over 6 years with 4% inflation.

7 American vs. PeopleExpress Page 7 After deregulation, low-cost carrier PeopleExpress was established circa 198 PeopleExpress charged 7% less than major airlines Fast growth over by serving underserved markets: Leisure passengers In 1984, attacked AA s bread-and-butter routes: Newark-Chicago and New Orleans-LA January 1985, American s counterattack: Ultimate Super Saver Discount fare if reserving 2 weeks before departure and staying over a Saturday night. Restrictions on the number of seats available under Ultimate Super Saver program Leisure passengers used Ultimate Super Saver while Business travelers paid the full fare. September 1985, PeopleExpress on the verge of bankruptcy We had great people, tremendous value, terrific growth. We did a lot of things right. But we didn t get our hands around the yield management and automation issues. Donald Burr, CEO of PeopleExpress

8 American s Experience with RM in 198 s Page 8 MOMS: Multiclass Optimization Modeling System, 1979 DADS: Discount Allocation Decision System, 198 CARS: City Allocation Report, 1981 SCARS: Super City Analysis System, 1982 DINAMO: Dynamic Inventory Allocation Modeling Optimizer, 1986 Airlines have been in the RM game for a long while. Hotels and Car Rental companies came afterwards.

9 Airline Mergers in the Wake of Low Profits Page 9 Trans World AA US Air America West Continental United Northwest Delta Western Value Jet AirTran Southwest Time axis is not drawn to scale. Post-merger horizontal lines are thicker. Deregulation 213 TWA AA US Air America West Continental United Northwest Delta Western Value Jet AirTran Southwest Based on the data in S. McCartney, 213. How the AMR Deal Might Affect Airline Service in US. February 14 issue of WSJ.

10 US Airlines when AA & US Air Merge Page Revenue in $B # of Aircrafts AA+US Air = =1,522 United Delta Southwest Airport Flights / week Departing seats / wk AA+US Air % United % Delta % South west % Other % CLT 4, , DFW 6,53 685, Spirit 3.3 PHL 3,89 352, MIA 3, , PHX 3, , ORD 7,541 75, LAX 4,95 693, JFK 3, , JetBlue 23.4 More than 5% share in CLT (Charlotte, NC), DFW, PHL, MIA, PHX. Based on the data in S. McCartney, 213. How the AMR Deal Might Affect Airline Service in US. February 14 issue of WSJ.

11 Airline Mergers: American + US Air = American over AA and US Air Merger started in 213, ended on Oct 29, 215 with a victorious announcement to passengers Based on S. Carey American Airlines Reservations Test: Smooth Travel This Weekend. Oct 15 issue of WSJ. S. Carey Few Glitches in American Switchover. Oct 18 issue of WSJ. Earlier mergers suffered from integration problems: [United and Continental] merged in 21 and made the system transition in early 212, disrupted passengers and employees alike for weeks. US Airways and America West Airlines linked up in 25, executed poorly on their IT transition two years later. AA s gradual transition Oct 17 Sat morning integration date Page 11 Before March 215: The US Airways cargo, revenue accounting, and employee- and retiree-travel functions already switched to American versions March 215: US Airways frequent flier plan was folded into the larger American AAdvantage program July: American started transferring reservations made on US Airways for travel on or after Oct 17 using American s flight codes and to its Sabre Corp. reservations-system provider. American also stopped offering a US Airways schedule beyond Oct. 17, forcing passengers to shift bookings to American. On Oct. 17, US Airways operates ~2 fewer flights to its three hubs (11% less than usual) to lighten the load on the system. For the transition period, [American] raised airport staffing levels by more than 2%. American s big switch [was] run from a command center near its headquarters... There also [were] 23 satellite offices, including one at Sabre s reservations database in Tulsa, Okla. The centers went live on Oct 14 and [were] expected to stay open around the clock until Oct 27.

12 Revenue Management Strategy Customer Segmentation Page 12 Leisure Passengers vs. Business Passengers Leisure passengers are highly price sensitive They book earlier They have more flexibility in departure and arrival times They accept or prefer Saturday night stayover Finer segmentation is also possible among Leisure and Business Passengers depending on price sensitivity, schedule flexibility, etc. Other airline customer segments include Government employees, senior citizens, children, frequent flyers, etc. International pricing: Same ticket at different prices in different countries.» Any logic here? This may be a relic of the past as it does not make much sense in the age of Internet. Distribution channel based segmentation, see next page: Travel agent in person vs. Travel agent software vs. Airline s website. In addition to these, hotels, theme parks and cruise lines can have city-oforigin based pricing Hotels: Kamaaina rates for Hawaii residents Theme Parks: Disney s resident rates for Orlando residents Cruise Lines: City-of-origin needed to fly the passengers from out of town

13 Reservation and Distribution System Page 13 Computerized Reservation System Global Distribution System Amadeus, Galileo, Sabre, Worldspan Large Corporate Travel Agent 8 Number Frequent Flyer Program Air lines.com Business Customers Travel agent.com Opaque.com Distressed.com Leisure Customers

14 Booking Control Booking Limits & Protection Levels Page 14 Booking control Restricting the number of products (seats, rooms, rental cars) sold to customer classes To ensure that limited number of products sold to low-paying customers Booking limit (b) for a fare class is the maximum number of products that can be sold in that class or in lower classes. Protection level (y) for a fare class is the number of products reserved for that class or higher classes. Protection levels To ensure that enough products are sold to high-paying customers

15 Booking Limit vs. Protection Level 2 Fare Classes at a Hotel 2 classes: low paying and high-paying customers for the same room. Limits and levels for nested classes. The booking limits, one for the low-paying customers, is the maximum number of rooms to sell to low-paying customers. booking limit for high-paying customers? No! another for the low-paying and high-paying customers, is the maximum number of rooms to sell to low-paying and high-paying customers. Effectively, the booking limit for these is the capacity. The protection levels one for the high-paying customers, is the number of rooms reserved for high-paying customers. protection level for low-paying customers? No! one for the low-paying and high-paying customers, is the number of rooms reserved for low-paying and high-paying customers. This is the capacity. Only two numbers above differ from the capacity: booking limit for the lowpaying customers and the protection level for high-paying customers: Capacity 2 rooms 5 rooms protected for high-paying customers 2-5=15 rooms is the booking limit for lowpaying customers Page 15 low-paying customers high-paying customers 15 booking limit 5 protection level 2 The rooms are not physically allocated to classes. Allocation is virtual. Room number 16 can serve both class R and class Q.

16 Multiple Fare Classes Nested Booking Limits Suppose classes are 1,2,3, and 1 is the highest class. Nestedness can be illustrated with at least 3 classes. 3 request arrivals{class 2, Class 2, Class 3} in 3 sequences: A=223, B=232, C=322 Page 16 Nested limits: A limit is for a class and all lower classes. Booking limit for class {3} is 1; booking limit for classes {2,3} is 2. Request Arrival Sequence A = Class 2 Class 2 Class 3» Class 2 accepted, class 2 accepted and class 3 rejected» Sold capacity=2; Revenue = 2*[Class 2 price] Request Arrival Sequence B = Class 2 Class 3 Class 2» Sold capacity=2; Revenue = [Class 2 price]+[class 3 price] Request Arrival Sequence C = Class 3 Class 2 Class 2» Sold capacity=2; Revenue=[Class 3 price]+[class 2 price] b 1 b 2 Partitioned limits (Allotments): A limit is set for a single class only. Booking limit for class {3} is 1; booking limit for class {2} is 1. Request Arrival Sequence A = Class 2 Class 2 Class 3» Sold capacity=2; Revenue=[Class 2 price]+[class 3 price] Request Arrival Sequence B = Class 2 Class 3 Class 2» Sold capacity=2; Revenue = [Class 2 price]+[class 3 price] Request Arrival Sequence C = Class 3 Class 2 Class 2» Sold capacity=2; Revenue=[Class 3 price]+[class 2 price] b 3 Sold capacity and revenues are the same except for Sequence A where nested limits are better. Allotment violates RM s first principle: high-paying customers have priority over low-paying customers.

17 Multiple Fare Classes: Nested Booking Limits with Another Set of Arrivals 3 request arrivals{class 2, Class 3, Class 3} in 3 sequences: A=233, B=323, C=332 Nested limits: Booking limit for class {3} is 1; booking limit for classes {2,3} is 2. Request Arrival Sequence A = Class 2 Class 3 Class 3» Sold capacity=2; Revenue = =[Class 2 price]+[class 3 price] Request Arrival Sequence B = Class 3 Class 2 Class 3» Sold capacity=2; Revenue = [Class 3 price]+[class 2 price] Request Arrival Sequence C = Class 3 Class 3 Class 2» Sold capacity=2; Revenue = [Class 3 price]+[class 2 price] b 1 b 2 Page 17 Partitioned limits (Allotments): Booking limit for class {3} is 1; booking limit for class {2} is 1. Request Arrival Sequence A = Class 2 Class 3 Class 3» Sold capacity=2; Revenue=[Class 2 price]+[class 3 price] Request Arrival Sequence B = Class 3 Class 2 Class 3» Sold capacity=2; Revenue = [Class 3 price]+[class 2 price] Request Arrival Sequence C = Class 3 Class 3 Class 2» Sold capacity=2; Revenue = [Class 3 price]+[class 2 price] Sold capacity and revenues are the same in all Sequences A, B, C. The other 3 request arrivals involving Classes 2 and 3 include only one class (e.g., 222 or 333) so they result in the same revenues under both nested limits & partitioned limits. On this page and the previous one, we have considered all arrivals involving 3 requests of Class 2 and 3 and all possible sequences. Nested limits are better in one instance and never worse. In general, nested limits are better. b 3

18 Multiple Fare Classes: Nested Booking Limits, Another Example with Batch Arrivals Page 18 Batch arrivals of customers to the reservation system, when they travel together Booking limits should be nested for batch arrivals as well Nested limits: A booking limit is set for a class and all lower classes. Suppose classes are 1,2,3 & 1 is the highest class.» Booking limit for class {3} is 8 and the booking limit for classes {2,3} is 2.» After selling 12 to class 2 customers,» Requests for 6 more class 2 or 3 customers are accepted, If class 2: +<8 limit for class 3; limit for class 2 and 3 If class 3: +6 8 limit for class 3; limit for class 2 and 3 Partitioned limits (Allotments): A limit is set for a single class only.» Booking limit for class {3} is 8 and the booking limit for classes {2} is 12.» After selling to 12 class 2 customers,» Requests for 6 more class 2 or 3 customers, Request for 6 more class 2 is rejected, 12+6>12. Request for 6 more class 3 is accepted » This is accepting low-paying customers while rejecting high-paying customers.

19 What are Fare Classes at a Hotel? Physically but minimally differentiating the product Consider a standard room, not a deluxe or a suit. Class 1: Free Internet, Fruits at arrival, daily Newspaper, 2 bottles of water everyday, choice of bed (2 queens or a king). These services are just add-ons that are not specific to the room size. Class 2: Internet at $5/day. The rest is the same as Class 1. Class 3: No fruits; The rest is the same as Class 2. Class 4: No newspaper; The rest is the same as Class 3. Class 5: Water at $3/bottle; The rest is the same as Class 4. Class 6: No choice of bed type; The rest is the same as Class 5. Prices: $25; $22; $19; $16; $13; $1. Cost of extra services cannot justify the price differential of $3. Prices are not cost based but value based, and used to segment the customers. Different distribution channels can use different selling practices: When minimally differentiated, show available classes whose prices differ and ask customers to choose 6 days before check-in available classes={1,2,3,4,5,6}, show these 3 days before check-in available classes={1,2,3,4,5}, show these 1 days before check-in available classes={1,3,5}, show these 2 days before check-in available classes={1,3}, show these Do not even minimally differentiate products: Exactly the same room. Show only the minimum priced available class and ask customers to buy it 6 days before check-in available classes={1,2,3,4,5,6}, show 6 3 days before check-in available classes={1,2,3,4,5}, show 5 1 days before check-in available classes={1,3,5}, show 5 2 days before check-in available classes={1,3}, show 3 b 1 b 2 b 3 b4 b 5 b 6 Page 19 Rooms are not physically allocated to classes. Allocation is virtual. For example, room number 26 can serve class 1, 2, 3, 4, 5 or 6.

20 Multiple Fare Classes Nested Booking Limits and Protection Levels Classes indexed by jj = 1,2,, nn. jj = 1 is the highest class, while jj = nn is the lowest class. Booking limit bb ii for class i limits bookings for classes jj = ii,, nn = ii nn Protection level yy ii for class i protects future reservations or classes jj = 1,2,, ii = 1 ii. Capacity = bb 1 = yy nn ; = bb nn+1 = yy Booking limits Protection levels {n} {n-1,.,n} {3,.,n} {2,.,n} {1,.,n} {1,.,n} {1,.,n-1} {1,2,3} {1,2} {1} Page 2 Class 1 Class 2 Class 3 Class n-1 Class n Because of nestedness, = b n+1 < b n < b n-1 <. < b 2 < b 1 and y n > y n-1 > y n-2 >. > y 1 > y =.

21 Capacity=Booking Limits + Protection Levels Booking limit bb ii for class i limits bookings for classes {ii,, nn}. Protection level yy ii 1 for class ii 1 protects future reservations or classes {1,2,, ii 1}. Booking limit b i protects classes {1,, ii 1}: [Limiting classes {ii,, nn}] [Reserving for classes {1,, ii 1}]. Number reserved for 1,, ii 1 : yy ii 1 = capacity bb ii = bb 1 bb ii. Page 21 Class 1 y n y n-1 y n-2 {1,.,n} {1,.,n-1} {1,.,n-2} {1,2,3} {1,2} y 3 y 2 y 1 {1} y {} Class 2 Class 3 Class n-1 bb ii + yy ii 11 = capacity Class n {} {n} {n-1,.,n} {4,.,n} {3,.,n} {2,.,n} {1,.,n} b n+1 b n b n-1 b 4 b 3 b 2 b 1

22 Summary: Booking Limits and Protection Levels Page 22 y n y n-1 y n-2 y 3 y 2 y 1 y Class 1 Class 2 Class 3 Capacity Class n-1 Class n b n+1 b n b n-1 b 4 b 3 b 2 b 1

23 Example: Increasing Bookings Protect less for Class 2 and above Page y 5 y 4 y 3 y 2 y 1 y Class 1 Protection levels 5 Requested for Class 2 Class 3 Class 4 Booking limits Class 5 b 6 b 5 b 4 4 b 3 12 b 2 73 b 1 1 Reduce booking limit for class 2 and above This approach is pursued in the appendix. Altering booking limits is confusing.

24 Example: Increasing Bookings while Keeping Booking Limits Constant Page 24 Suppose Booking limits=b=(b 1, b 2, b 3, b 4, b 5 ) = (1, 73, 12, 4, ). Current bookings=b=(b 1, B 2, B 3, B 4, B 5 ) = (,,,, ) 5 requested for class 2; Let x=(x 1, x 2, x 3, x 4, x 5 ) = (5, 5,,, ) for the request. Class 2 bookings are restricted by b 2 =73 (applies to classes 2..5) and b 1 =1 (applies to classes 1..5). Both have enough room as b 2 -x 2 =68 and b 1 -x 1 =95, so accept the request. Set the current bookings to B=(5, 5,,, )=(,,,, )+(5, 5,,, ). 1 requested for class 2; Let x = (1, 1,,, ) for the request. Since b 2 -B 2 -x 2 =67 and b 1 -B 1 -x 1 =94, accept the request. Set the current bookings to B= (6, 6,,, )=(5, 5,,, ) + (1, 1,,, ). 1 requested for class 4; Let x = (1, 1, 1, 1, ) for the request. Since b 4 -B 4 -x 4 =3, b 3 -B 3 -x 3 =11, b 2 -B 2 -x 2 =66 and b 1 -B 1 -x 1 =93, accept the request. Set the current bookings to B=(7, 7, 1, 1, )= (6, 6,,, )+(1, 1, 1, 1, ). 3 requested for class 3; Let x = (3, 3, 3,, ) for the request. Since b 3 -B 3 -x 3 =8, b 2 -B 2 -x 2 =63 and b 1 -B 1 -x 1 =9, accept the request. Set the current bookings to B=(1, 1, 4, 1, )=(7, 7, 1, 1, )+(3, 3, 3,, ). 4 requested for class 4; Let x = (4, 4, 4, 4, ) for the request. Since b 4 -B 4 -x 4 =-1<, b 3 -B 3 -x 3 =4, b 2 -B 2 -x 2 =59 and b 1 -B 1 -x 1 =86, reject the request. Keep the bookings as B=(1, 1, 4, 1, ). 2 requested for class 1; Let x = (2,,,, ) for the request. Since b-b-x=(88, 63, 8, 3, ), accept the request. Set the bookings to B =(1, 1, 4, 1, ) + (2,,,, ) =(12, 1, 4, 1, ).

25 Example: Increasing Bookings while Keeping Booking Limits Constant b=(b 1, b 2, b 3, b 4, b 5,)=(1, 73, 12, 4, ). B=(B 1, B 2, B 3, B 4, B 5 )=(12, 1, 4, 1, ). 3 requested for class 2; Let x=(x 1, x 2, x 3, x 4, x 5,) = (3, 3,,, ) for the request. Since b-b-x=(58, 33, 8, 3, ), accept. Set B =(12, 1, 4, 1, ) + (3, 3,,, ) =(42, 4, 4, 1, ). 2 requested for class 2; Let x = (2, 2,,, ). Since b-b-x=(38, 13, 8, 3, ), accept. Set B =(42, 4, 4, 1, ) + (2, 2,,, ) =(62, 6, 4, 1, ). 1 requested for class 3; Let x=(1, 1, 1,, ). Since b-b-x=(28, 3, -2, 3, ) fails, reject. Keep B =(62, 6, 4, 1, ). 6 for class 3, x=(6, 6, 6,, ). If b-b-x=(32, 7, 2, 3, ), accept. Set B =(62, 6, 4, 1, )+(6, 6, 6,, )=(68, 66, 1, 1, ). 3 for class 3, x=(3, 3, 3,, ). Since b-b-x=(29, 4, -1, 3, ) fails, reject. Keep B =(68, 66, 1, 1, ). 6 for class 2, x=(6, 6,,, ). If b-b-x=(26, 1, 2, 3, ), accept. Set B =(68, 66, 1, 1, )+(6, 6,,, )=(74, 72, 1, 1, ). 1 for class 3, x=(1, 1, 1,, ). If b-b-x=(25,, 1, 3, ), accept. Set B =(74, 72, 1, 1, )+(1, 1, 1,, )=(75, 73, 11, 1, ). Page 25

26 Example: Increasing Bookings while Keeping Booking Limits Constant Page 26 b=(b 1, b 2, b 3, b 4, b 5,)=(1, 73, 12, 4, ). B=(B 1, B 2, B 3, B 4, B 5 )=(75, 73, 11, 1, ). Since b-b=(25,, 1, 3, ), all low fare classes are closed. Only the first class can accept from now on. 1 for class 5, x=(1, 1, 1, 1, 1). Since b-b-x=(24, -1,, 2, -1) fails, reject. Keep B =(75, 73, 11, 1, ). 1 for class 4, x=(1, 1, 1, 1, ). Since b-b-x=(24, -1,, 2, ) fails, reject. Keep B =(75, 73, 11, 1, ). 1 for class 3, x=(1, 1, 1,, ). Since b-b-x=(24, -1,, 3, ) fails, reject. Keep B =(75, 73, 11, 1, ). 1 for class 2, x=(1, 1,,, ). Since b-b-x=(24, -1, 1, 3, ) fails, reject. Keep B =(75, 73, 11, 1, ). 25 for class 1, x=(25,,,, ). If b-b-x=(,, 1, 3, ), accept. Set B =(75, 73, 11, 1, )+(25,,,, )=(1, 73, 11, 1, ). Since b-b=(,, 1, 3, ), all classes are closed. Recover bookings First class: B 1 -B 2 =27; Second class: B 2 -B 3 =62; Third class: B 3 -B 4 =1; Fourth class: B 4 -B 5 =1; Fifth class: B 5 =.

27 Booking Algorithm with Booking Limits Page 27 {Initialization} B :=. Booking limit b is given. {Both B and b are vectors of length n.} {Iterative step} While Remaining_capacity=b 1 -B 1 > do Suppose m requests for class i: x=[m,, m,,, ]. {x is a vector (of length number of classes) whose only first i elements are nonzero and equal to m. m< denotes a cancellation.} If b B+x, Accept the request and set B:=B+x; else Reject the request. EndWhile

28 Load factor: Utilization of resources. Increase by booking more. Yield: Revenue per passenger mile. Increase by booking less. RASM/CASM: Revenue/Cost per available seat mile. RASM=Net yield * Load factor. REVPAR: Revenue per available room night. Tactical Revenue Management Tactical RM is calculating and updating booking limits. Periodic checking/updates: Daily checking of expected vs. realized demand, when 15 or fewer days until departure. Less frequently if more days. Update booking limit if realized differs significantly from expected. Event-driven updates: NBA all-star game in Dallas in 21; Aircraft change. Some terminology Resources: Units of capacity managed by a supplier Products: What customers want to purchase. Fare class: Group or resources allocated to a segment of customers. Passenger Airline SOM Resource unit Seat Course Resource types Service classes OM, SCM, Finance, Energy Number of types 1-3 Many Page 28 Products Itineraries Degrees Resources in a product Many for hub-and-spoke airlines ; A few for point-to-point airlines. Many for MBA; Fewer for Master.

29 Tactical Revenue Management Page 29 Capacity Allocation: Booking for various fare classes. Network management: Booking across the flight network of an airline or multiple days at a hotel. Network management is not relevant for» Club-Med Resorts accepts check-in only on Sundays and a minimum stay of at least 7 days.» Point-to-point airlines.» Cruise lines depart on a certain day & everybody on-board remains on the ship for the same number of days.» Concert and sport events are similar to cruise lines, the start and ending time of the event is the same for everybody. Exception: Some jazz clubs run multiple sittings on a single night. Some patrons stay for 2 sittings in a row. Overbooking: Booking extra to compensate for no-shows. Resorts, cruise lines, events are not overbooked. In these industries, there is no viable method of serving to an overbooked customer. Some airline tickets are refundable and parts of customer s hotel costs can be recovered when one does not show up. Because of these, both airlines and hotels use overbooking.

30 Systematic View of Revenue Management Page 3 Smith, Guenther, Rao & Ratliff (21) E-Commerce & Operations Research in Airline Planning, Marketing & Distribution, INTERFACES 31:2

31 Net Contribution=Price+Ancillary Fees Incremental Cost Page 31 Incremental costs and fee obtained from ancillary products/services can change the net contribution. Relative importance of incremental costs depends on the industry Incremental Cost Importance Cruise lines Commission, food, cleaning High Container shipping Repositioning, handling, fuel High Passenger airlines Commission, fuel, food, passenger fees Moderate Rental cars Commission, processing, wear/tear Moderate University Extra sessions, TAs, wear/tear Moderate Hotels Commissions, cleaning, wear/tear Low Casinos Commissions, cleaning, wear/tear Low Events Commissions Very low

32 Net Contribution=Price+Ancillary Fees Incremental Cost Industry-dependent Relative Importance of Ancillary Fees. Ancillary fees Importance Passenger airlines Food, beverage, ear-phone, duty-free sales Low University Activity fee, library fee Low-Moderate Hotels Food, beverage, minibar, internet, phone fees Moderate Container shipping Call before delivery, expediting Moderate Rental cars Insurance, gasoline Moderate Cruise lines Gambling, on-board sales Moderate-High Casinos Gambling losses High Events Food, beverage, merchandise, parking Very high What to expect in the future? Page 32 Ancillary fees becoming more important for passenger airlines.

33 Recent Trends: RM in Practice Strategic customer: Because of fare visibility, ease of communication among customer groups, customers are better informed than ever before. They may optimize the timing, the amount of their purchases. Case in point: Strategic retail customers wait for discounting season. A higher percentage of merchandise is sold every year through discounting. Can the retailers remain in business without resorting to discounts. Neiman Marcus (One Marcus Square, 1618 Main Street, Dallas) is trying. Yapta.com: Price drop alerts help you to time the purchase. Online travel agents/intermediaries (Expedia, Travelocity and Priceline) provide cheaper distribution channels. Attempting to book a hotel in San Diego: Google search for cheap hotels San Diego takes you to Expedia.com. You book a hotel with Expedia and pay Expedia not the hotel. Expedia pays a wholesale rate to the hotel. The hotel will not reveal the wholesale rate to customers unless you insist. If you insist after the check-out, you will see that Expedia charges about 2% premium as distribution/commission fee. Opaque products: Hidden product attributes. Go to priceline.com bid for a hotel in San Diego for three nights, starting on coming Saturday.» 1. Choose location: Downtown San Diego & Harbor Island.» 2. Choose star level: 3.5 stars or more.» 3. Name your price: $7 per night. (You are prompted with a median price of $187 per night reference price.)» 4. Enter name/credit card info. What exactly did you buy? Last-minute deals: See Customer specific satisfaction measures as opposed to timely departure and arrival D, A14: On-time departure and at most 14 minute late arrival per flight; binary data reported to FAA, DOT. Delay in each customer s arrival time per customer; data in minutes are integers, captured by AA but not reported outside the company, according to Oct Informs DFW Chapter presentation by Jim Diamond. Page 33

34 When to Buy a Ticket Page 34 Source: S. McCartney. The Best Day to Buy Airline Tickets. WSJ The Middle Seat Column, Oct 22, 214.

35 Summary Page 35 History Levels of Decisions Strategy Tactics Net Contribution Follow-up reading: Phillips (25) Chapter 6

36 Example: Decreasing Limits & Levels 5 Fare Classes Page 36 Affected y 5 y 4 y 3 y 2 y 1 y Class 1 Protection levels 5 Requested for Class 2 Class 3 Class 4 Booking limits Class 5 b 6 b 5 b 4 4 b 3 12 b 2 73 b 1 1 Affected

37 Example: Booking Limits and Protection Levels 5 Classes Page 37 Class Class for Class 2 Class 2 Class 3 Class 3 Class 4 1 for Class 4 Class 5 Class Class Class Class 2 Class 2 3 for Class 3 Class 4 Class 3 4 for Class 4 Request Rejected Class Class

38 Example: Booking Limits and Protection Levels 5 Classes Page 38 2 for Class Class Class 2 3 for Class 2 Class 3 Class 3 Class 4 Class 4 Class Class Class Class for Class 2 Class 3 Class 2 1 for Class 3 Request Rejected Class 4 Class 4 Class Class

39 Example: Booking Limits and Protection Levels 5 Classes Page 39 Class Class Class 2 Class 2 max{35-6,3} 6 for Class 3 Class 4 Class 3 Class 4 Order preserving operations min{3,8-6} Class Class Class Class Class 2 3 for Class 3 Request Rejected 6 for Class 2 Class 3 Class 4 Class 4 Class Class

40 Example: Booking Limits and Protection Levels 5 Classes Page 4 Class 1 Class 2 Class 3 Class max{3-6,25} max{3-6,25} min{2,1} min{2,7-6} Class 1 Class 2 1 for Class 3 Class Class Class Class 1 Class 2 Class 3 Class 4 Class All low-fare classes are closed. From now on accept only the first class. Recover bookings by accumulating accepted bookings. We must make order preserving operations to preserve nestedness. These are cumbersome. Why not to keep booking limits constant and increase bookings? See the algorithm in the main body.