chapter  3
30 Pages

Optimal Fencing in Airline Industry with Demand Leakage

Four decades from its beginning in the airline industry, revenue management (RM) practice evolved rapidly to complex systems with applicability in many industries and gained researchers’ attention. McGill and Ryzin (1999) and more recently Chiang et al. (2007) presented in detail an overview of RM research. After the 1983 US Airline Deregulation Act, considered as one of the most important applications of management science and operations research (Bell, 1998), two essential features remained in RM practice: demand segmentation (which for an airline means managing the set of fare classes)

3.1 Introduction 53 3.2 Model Development 56

3.2.1 No Fencing Investment 58 3.2.2 With Fencing Investment 59

3.3 Model Analysis 60 3.3.1 Hierarchical Optimization 60 3.3.2 Joint Optimization 62 Linear Fencing Cost 63 Nonlinear Fencing Cost 63

3.4 Numerical Experimentation 64 3.5 Conclusions 69 Appendix 3.A 69 Acknowledgment 80 References 80

and fare classes availability management. In particular, airline RM research has focused on four categories: forecasting, overbooking, quantity/inventory (booking) control and pricing; however, as noticed in Cote et al. (2003), integration of pricing and quantity controls is expected to improve the firm’s revenue. The tactics and strategies of RM are applied in general in business that has a fixed or perishable resource like the flight seats in airline business or the hotels’ rooms.