REVENUE MANAGEMENT &

DYNAMIC PRICING
INTRODUCTION TO AIRLINE REVENUE
MANAGEMENT

Prof. Preetam Basu

IIM Calcutta
Levels of Airline Revenue Management

 Execution at three levels

Level Description Frequency

Strategic Segment market & differentiate Quarterly or

prices annually

Tactical Calculate & update booking limits Daily or weekly

Booking Determine which bookings to Real time

Control accept and which to reject
 Strategic Airline Revenue Management

 Characteristics of business vs. leisure customers at passenger

airlines
Leisure Business
Highly price sensitive Less price sensitive
Book earlier Book later
More flexible to departure and arrival Less flexible
times
More accepting of restrictions such as Less accepting of restrictions
Saturday night stay-overs

 Group Segmentation
 Channel Segmentation
Airline Reservation Systems
 SABRE implemented by American Airlines, Galileo owned by United Airlines,
Worldspan owned by Northwest Airlines. Jet Airways uses SABRE Airlines
Solutions, Air India uses SITA Passenger Management system
 These systems combine a computerized reservation system (CRS) and a global
distribution system (GDS)

Business customers
Leisure customers

Large Travel 800 Internet Airline

Corporate Agent number Intermediaries website
s

GDS

Computerized Reservation System (CRS)

Tactical Revenue Management
 Calculate and update booking limits
 Components
 Capacity Allocation
 How many customers from different fare classes should be
allowed to book?
 Network Management
 How should bookings be managed across a network of
resources?
 Overbooking
 How many total bookings should be accepted in the face of
uncertain future no-shows?
Booking Control
 Real-time face of airline revenue management

 Whether or not to accept a booking request

 Within 200 milliseconds the reservation needs to send

acceptance or rejection

 Requests are assigned fare classes denoted by letters, e.g., B-

Class, M-Class etc.

 There are booking limits for each fare class on each aircraft
Allotment of Seats to Different Classes

 Suppose a 100-seat aircraft is being managed using

allotments. 30 seats have been allotted to deep-
discounts, B-class with $125 fare; 45 seats to full-fare
coach, M-class with $200 fare and 25 seats to business
class, Y-class with $560 fare. Two-weeks before
departure 25 B-class bookings, 45 M-class bookings and
10 Y-class bookings have been accepted. The remaining
allotments are: 5 seats for B-class, no seats for M-class
& 15 seats for Y-class
Clearly not the “best” solution.
Revenue Management “sin”, rejecting high-fare customers and saving seats for low-
fare customers
 Implementing Booking Control
 Allotments
 Divide the available capacity into different fare classes
 Nesting
 At each time every fare class has access to all of the inventory available
to lower fare class
 Protection level: The protection level for a class is the total number of
seats available to that class and all higher classes
Seats protected for Classes 1 & 2

Seats protected for Class 1

Booking limit for Class 3

Protection level for the jth class= booking limit
Booking limit for Class 2 for the highest fare class - booking limit for the
(j+1)th class
Example
 A flight has a total capacity of 100 seats and five fare classes
given by (b1,b2,b3,b4,b5) with b1 being the highest fare class.
 What is the booking limit for b1?
 Suppose the booking limits for the different fare classes are
(100,73,12,4,0). Derive the corresponding protection levels.
 Answer: (27,88,96,100,100)
Measuring Revenue Management Effectiveness

 Available Seat Miles=(Total number of seats

available)*(Total miles flown)
 Revenue Passenger Miles=(Total number of revenue paying
passengers)*(total miles flown)
 Summation of the products of the revenue carried on each segment
multiplied by the miles flown in that segment
 System RPM are the sum of RPM for each segment
 Load Factor=Revenue Passenger Miles/Available Seat Miles
 Yield=Passenger Revenue/Revenue Passenger Miles
 Revenue per Available Seat Mile=Net Yield*Load factor
=Net Revenue/Available Seat Miles