Airline revenue management with preference based flexible products

ABSTRACT

Airlines apply the revenue management techniques of dynamic pricing and capacity control to maximize revenue. Traditional capacity control techniques assume that the airlines offer only specific products to customers, i.e. departure and arrival date and times are fixed. However, airlines may also offer flexible products by which, a passenger will come to know about the departure time at a later time and not while booking tickets. Flexible products though discussed in literature are not well researched and in this work an attempt is being made to address this literature gap. We develop a new class of product called flexible products with preferences; this class can be thought of as intermediate between specific and flexible products. These products are designed for customers who are flexible about the departure times but have preferences among them. We focus on the development of capacity control techniques when flexible products (including flexible products with preferences) are offered along with specific products. We develop a heuristic to determine a booking and seat allocation policy for all forms of flexible products. Such flexible products sold at lower prices will lead to more demand induction at the expense of cannibalizing the potential high fare demand. Hence we also evaluate the effect of demand induction and cannibalization on the capacity control and the revenue generated by the introduction of all forms of flexible products. Simulation experiments are performed to illustrate the techniques developed.

KEYWORDS:

• Pricing
• revenue management
• flexible products
• dynamic programming

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Arfat Shabbir Duduke

Mr Arfat Shabbir Duduke is a credit risk professional with expertise in development and validation of credit risk models. He holds a Master of Technology degree from Indian Institute of Technology Kanpur. His research interests include Credit risk, Data analytics, applied Operations research and Machine learning. 

Sri Vanamalla Venkataraman

Ms Sri Vanamalla Venkataraman is currently an Associate Professor in the Department of Industrial and Management Engineering, Indian Institute of Technology Kanpur. Her research interests include applied Operations research and Game theory.