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Chapter3Review

QOS
y QOSElasticit #Flights ity TimeElastic ity PriceElastic

QOS ASM

UnitCost UnitCost

RPM RPM RPM


Dem and

Yield

Economies OfScale OperatingExpense Profit

Revenue

Spill

FundamentalsofPricingand RevenueManagement
Chapter4 Lesson3

Outline
AirlinePricingandODMarkets
PricingStrategies PriceDiscriminationvs.ProductDifferentiation

AirlineDifferentialPricing
willingnesstopay(WTP)

AirlineRevenueManagement

AirlinePricingandODMarkets PricingStrategies

AirlinePricesandODMarkets
Pricing referstotheprocessofdeterminingfarelevels,combined withvariousserviceamenitiesandrestrictions,forasetoffare productsinanorigindestinationmarket RevenueManagement isthesubsequentprocessofdetermining howmanyseatstomakeavailableateachfarelevel RegulatedPricing theCivilAeronauticsBoard(CAB)useda mileagebasedformulatoensureequalpricesforequaldistances Deregulated orLiberalizedPricing DifferentODmarketscan havepricesnotrelatedtodistancetraveled,oreventheairlines operatingcosts,asairlinesmatchlowfarecompetitorstomaintain marketpresenceandshareoftraffic
ItspossiblethatlowvolumeODmarketsaremorecostlytoserveper passengerbasiswillseehigherpricesthanhighdensityODmarkets,even ifsimilardistancesareinvolved

TheoreticalPricingStrategies
FordeterminingpricestochargeinanODmarket, airlinescanutilizeoneoffollowingeconomicprinciples:
Costbasedpricing Demandbasedpricing Servicebasedpricing

Inpractice,mostairlinepricingstrategiesreflectamixof thesetheoreticalprinciples:
PricesarealsohighlyaffectedbycompetitionineachOD Market IntheUS,severecompetitioninsomemarketshasledto pricebasedcosting,meaningairlinesmustreducecoststo beabletomatchlowfarecompetitorsandpassengers price expectations

PriceDiscriminationvs.Product Differentiation
Pricediscrimination:
Thepracticeofchargingdifferentpricesforsameproduct withsamecostsofproduction Basedsolelyondifferentconsumers willingnesstopay

Productdifferentiation:
Chargingdifferentpricesforproductswithdifferent characteristicsandcostsofproduction

Currentairlinefarestructuresreflectbothstrategies:
DifferentialPricingbasedondifferentiatedfareproducts Buthigherpricesforfareproductstargetedatbusiness travelersareclearlybasedontheirwillingnesstopay

AirlinePricingPractices
Differentialpricingpresentsatradeofftocustomers betweeninconvenienceandpricelevels:
Businesstravelersarewilling topayhigherfaresinreturn formoreconvenience,fewerrestrictionsonuseoftickets Leisuretravelerslesswilling topayhigherprices,butaccept disutilitycosts ofrestrictionsonlowfareproducts

Economicconceptofwillingnesstopay(WTP)isdefined bythetheoreticalpricedemandcurve:
Willingness doesnotmeanhappiness inpayinghigher prices DifferentialpricingattemptstomakethosewithhigherWTP purchasethelessrestrictedhigherpricedoptions

DifferentialPricingTheory(circa2000)
Marketsegmentswith differentwillingnessto pay forairtravel Differentfareproducts offeredtobusiness versusleisuretravelers Preventdiversionby settingrestrictionson lowerfareproductsand limitingseatsavailable Increasedrevenuesand higherloadfactorsthan anysinglefarestrategy

Price

Demand

AirlineDifferentialPricing

WhyDifferentialPricing?
Itallowstheairlinetoincreasetotalflightrevenueswithlittleimpact ontotaloperatingcosts: Incrementalrevenuegeneratedbydiscountfarepassengerswho otherwisewouldnotfly Incrementalrevenuefromhighfarepassengerswillingtopay more Studieshaveshownthatmosttraditional highcostairlinescould notcovertotaloperatingcostsbyofferingasinglefarelevel Consumerscanalsobenefitfromdifferentialpricing: Mostnotably,discountpassengerswhootherwisewouldnotfly Itisalsoconceivablethathighfarepassengerspaylessand/or enjoymorefrequencygiventhepresenceoflowfarepassengers Ifairlinecouldchargeadifferentpriceforeachcustomerbasedon theirWTP,itsrevenueswouldbeclosetothetheoreticalmaximum

MarketSegmentation
BusinessandLeisuretravelersarethetwo traditionalsegmentstargetedbytheairlinesin theirdifferentpricingefforts
FirstClass,BusinessClass,andEconomy Restrictionsonadvancepurchase,use,and refundability

Awideenoughrangeoffareproductoptionsat differentpricelevelsshouldbeofferedtocapture asmuchrevenuepotentialfromthemarket pricedemandcurveaspossible

TraditionalApproach:Restrictionson LowerFares
Progressivelymoresevererestrictionsonlowfare productsdesignedtopreventdiversion:
Lowestfareshaveadvancepurchaseandminimumstay requirements,aswellascancellationandchangefees Restrictionsincreasetheinconvenienceordisutility cost oflowfarestotravelerswithhighWTP,forcing themtopaymore StudiesshowSaturdaynightminimumstay condition tobemosteffectiveinkeepingbusinesstravelersfrom purchasinglowfares

Still,itisimpossibletoachieveperfectsegmentation:
SometravelerswithhighWTPcanmeetrestrictions Manybusinesstravelersoftenpurchaserestrictedfares

Example:RestrictionDisutilityCosts

Example:BOSSEATraditional Fares
RoundTrip Fare($) $458 $707 $760 $927 $1001 $2083 $2262 $2783 Cls N M M H H B Y F Advance Purchase 21days 21days 21days 14days 14days 3days None None Minimum Stay Sat.Night Sat.Night Sat.Night Sat.Night Sat.Night None None None Change Fee? Yes Yes Yes Yes Yes No No No Comment Tue/Wed/Sat Tue/Wed ThurMon Tue/Wed ThurMon 2xOWFare 2xOWFare FirstClass

Figure4.5

FareSimplification: LessRestrictedandLowerFares
Recenttrendtowardsimplified farescompressedfare structureswithfewerrestrictions
InitiatedbysomeLFAsandAmericaWest,followedbyAlaska Mostrecently,implementedinallUSdomesticmarketsby Delta,matchedselectivelybylegacycompetitors

Simplifiedfarestructurescharacterizedby:
NoSaturdaynightstayrestrictions,butadvancepurchaseand nonrefundable/changefees Revenuemanagementsystemsstillcontrolnumberofseats soldateachfarelevel

Higherloadfactors,but1015%lowerrevenues:
Significantlyhigherdiversionwithfewerrestrictions

Example:BOSATLSimplifiedFares DeltaAirLines,April2005

RevenueImpactofEachSimplification

ImpactsonDifferentialPricingModel
Dropinbusiness demandandwillingness topayhighestfares Greaterwillingnessto acceptrestrictionson lowerfares Reductioninlowest farestostimulatetraffic andrespondtoLCCs Resultislowertotal revenueandunitRASM despitestableload factors

Price

Demand

AirlineRevenueManagement

AirlineRevenueManagement
Twocomponentsofairlinerevenuemaximization:
DifferentialPricing: Variousfareproducts offeredatdifferentpricesfor travelinthesameODmarket YieldManagement(YM): Determinesthenumberofseatstobemadeavailableto eachfareclass onaflight,bysettingbookinglimitson lowfareseats

Typically,YMtakesasetofdifferentiated prices/productsandflightcapacityasgiven:
Withhighproportionoffixedoperatingcostsfora committedflightschedule,revenuemaximizationto maximizeprofits

WhyCallitYieldManagement?
MainobjectiveofYMistoprotectseatsforlaterbooking, highfarebusinesspassengers. YMinvolvestacticalcontrolofairlinesseatinventory:
Buttoomuchemphasisonyield(revenueperRPM)canlead tooverlyseverelimitsonlowfares,andloweroverallload factors Toomanyseatssoldatlowerfareswillincreaseloadfactors butreduceyield,adverselyaffectivetotalrevenues

Revenuemaximizationispropergoal:
Requiresproperbalanceofloadfactorandyield

ManyairlinesnowrefertoRevenueManagement(RM) insteadofYieldManagement

SeatInventoryControlApproaches

Figure4.11

ComputerizedRMSystems
Sizeandcomplexityofatypicalairlinesseatinventory controlproblemrequiresacomputerizedRMsystem ConsideraUSMajorairlinewith:
500flightlegsperday 15bookingclasses 330daysofbookingsbeforedeparture

Atanypointintime,thisairlinesseatinventoryconsists ofalmost2.5millionbookinglimits:
Thisinventoryrepresentstheairlinespotentialforprofitable operation,dependingontherevenuesobtained Fartoolargeaproblemforhumananalyststomonitoralone

Typical3rdGenerationRMSystem
Collectsandmaintainshistoricalbookingdataby flightandfareclass,foreachpastdeparturedate. Forecastsfuturebookingdemandandnoshowrates byflightdeparturedateandfareclass. Calculateslimitstomaximizetotalflightrevenues:
Overbookinglevelstominimizecostsofspoilage/denied boardings Bookingclasslimitsonlowvalueclassestoprotecthigh fareseats

InteractivedecisionsupportforRManalysts:
Canreview,acceptorrejectrecommendations

ExampleofThirdGenerationRMSystem

Figure4.12

RevenueManagementTechniques
Overbooking
Acceptreservationsinexcessofaircraftcapacityto overcomelossofrevenuesduetopassengernoshow effects

FareClassMix(FlightLegOptimization)
Determinerevenuemaximizingmixofseatsavailableto eachbooking(fare)classoneachflightdeparture

TrafficFlow(OD)Control(NetworkOptimization)
Furtherdistinguishbetweenseatsavailabletoshorthaul (oneleg)vs.longhaul(connecting)passengers,to maximizetotalnetworkrevenues

FlightOverbooking
Determinemaximumnumberofbookingstoaccept foragivenphysicalcapacity. Minimizetotalcostsofdeniedboardingsand spoilage(lostrevenue). U.S.domesticnoshowratescanreach1520percent offinalpredeparturebookings:
Onpeakholidaydays,whenhighnoshowsareleast desirable Averagenoshowrateshavedropped,to1015%with morefarepenaltiesandbettereffortsbyairlinestofirm upbookings

Effectiveoverbookingcangenerateasmuchrevenue gainasfareclassseatallocation.

OverbookingTerminology
PhysicalCapacity AuthorizedCapacity ConfirmedBookings NoShowRate DeniedBoardings Spoilage ShowupRate CAP AU BKD<=AU NSR DB SP SUR
Actual#ofseatsontheflight,usuallymaximumcapacityof theaircraft Maximum#ofbookingsthatanairlineiswillingtoaccept Total#ofpassengerreservationsthathavebeenaccepted Mean%ofpassengerswithconfirmedbookingsthatdonot showup

OverbookingModels
Overbookingmodelstrytominimize:
Totalcostsofoverbooking(deniedboardings plusspoilage) Riskofexcessive deniedboardingson individualflights,forcustomerservicereasons

Mathematicaloverbookingproblem:
FindOV>1.00suchthatAU=CAP*OV Butactualnoshowrateishighlyuncertain

Manual/JudgmentalApproach
Reliesonjudgmentofhumananalysttoset overbookinglevel:
Basedonmarketexperienceandperhapsrecent noshowhistory TendencytochooseOV=1+NSR(orlower) TendencytofocusonavoidanceofDB

ForCAP=100andmeanNSR=.20,then:
AU=100(1.20)=120

DeterministicModel
BasedonestimateofmeanNSRfromrecent history:
AssumethatBKD=AU(worstcasescenario) FindAUsuchthatAUNSR*AU=CAP Or,AU=CAP/(1NSR)

ForCAP=100andNSR=0.20,then:
AU=100/(1.20)=125

Probabilistic/RiskModel
IncorporatesuncertaintyaboutNSRforfutureflight:
StandarddeviationofNSRfromhistory,STD

FindAUthatwillkeepDB=0,assumingBKD=AU,witha 95%levelofconfidence:
Assumeaprobability(Gaussian)distributionofnoshowrates

KeepshowupslessthanorequaltoCAP,whenBKD=AU:
FindSUR*,sothatAUxSUR*=CAP, andProb[AUxSUR*>CAP]=5%

FromGaussiandistribution,SUR*willsatisfy:
Z=1.645=SUR*SUR STD whereSUR=meanshowuprate STD=standarddeviationofshowuprate

Probabilistic/RiskModel(cont.)
OptimalAUgivenCAP,SUR,STDwithobjectiveof DB=0with95%confidenceis:
AU= CAP SUR+1.645STD = CAP 1NSR+1.645STD

Inourexample,withSTD=0.05&NSR=.20:
AU=100/(10.20+1.645*0.05)=113

ThelargerSTD,thelargerthedenominatorandthe lowertheoptimalAU,duetoincreased risk/uncertaintyaboutnoshows.

MoreOverbookingTerminology
Waitlistedpassengers Goshowpassengers Standbypassengers Noshows Showups PassengersBoarded VoluntaryDB WL GS SB NS SU PAX VOLDB

ProbabilisticModelExtensions
ReducelevelofconfidenceofexceedingDBlimit:
Zfactorindenominatorwilldecrease,causingincreasein AU

IncreaseDBtolerancetoaccountforvoluntaryDB:
Numeratorbecomes(CAP+VOLDB),increasesAU

IncludeforecastedemptyForCcabinseatsfor upgrading:
Numeratorbecomes(CAP+FEMPTY+CEMPTY),increasesAU EmptyF+Ccouldalsobeoverbooked

Deductgroupbookingsandoverbookremaining capacityonly:
Firmgroupsmuchmorelikelytoshowup FlightswithfirmgroupsshouldhavelowerAU

CostBasedOverbookingModel
FindAUthatminimizes:
[CostofDB+CostofSP]

ForanygivenAU:
TotalCost=$DB*E[DB]+$SP*E[SP] $DBand$SP=costperDBandSP,respectively E[DB]=expectednumberofDBs,givenAU E[SP]=expectednumberofSPseats,givenAU

MathematicalsearchoverrangeofAUvaluestofind minimumtotalcost.

Example:CostBasedOverbookingModel

CostInputstoOverbookingModel
DeniedBoardingCosts:
CashcompensationforinvoluntaryDB FreetravelvouchersforvoluntaryDB Mealandhotelcostsfordisplacedpassengers Spaceonotherairlines Costoflostpassengergoodwillcosts

Manyairlineshavedifficultyproviding accurateDBcostinputstothesemodels.

DynamicRevisionandIntervention
RMsystemsreviseforecastsandreoptimizebooking limitsatnumerouscheckpoints ofthebookingprocess:
Monitoractualbookingsvs.previouslyforecasteddemand Reforecastdemandandreoptimizeatfixedcheckpointsor whenunexpectedbookingactivityoccurs Canmeansubstantialchangesinfareclassavailabilityfrom onedaytothenext,evenforthesameflightdeparture

Substantialproportionoffaremixrevenuegaincomes fromdynamicrevisionofbookinglimits:
Humaninterventionisimportantinunusualcircumstances, suchasunexplained surgesindemandduetospecialevents

CurrentStateofRMPractice
Mostofthetop25worldairlines(intermsofrevenue) haveimplemented3rdgenerationRMsystems. Manysmallercarriersarestilltryingtomakeeffectiveuse ofleg/fareclassRM
LackofcompanywideunderstandingofRMprinciples Historicalemphasisonloadfactororyield,notrevenue Excessiveinfluenceand/orRMabusebydominantsalesand marketingdepartments Issuesofregulation,organizationandculture

Aboutadozenleadingairlinesarelookingtoward networkODcontroldevelopmentandimplementation
Thesecarrierscouldachievea25yearcompetitiveadvantage withadvancedrevenuemanagementsystems

SingleLegSeatAllocation Problem
Givenforafutureflightlegdeparture:
Totalbookingcapacityof(typically)thecoach compartment Severalfare(booking)classesthatsharethesame inventoryofseatsinthecompartment Forecastsoffuturebookingdemandbyfareclass Revenueestimatesforeachfare(booking)class

Objectiveistomaximizetotalexpected revenue:
Allocateseatstoeachfareclassbasedonvalue

CostInputs(contd)
SpoilageCosts:
Lossofrevenuefromseatthatdepartedempty

Whatisbestmeasureofthislostrevenue:
Averagerevenueperseatforleg? Highestfareclassrevenueonleg(sinceclosed flightsloselatebookingpassengers)? Lowestfareclassrevenueonleg(sinceincreased AUwouldhaveallowedanotherdiscountseat)?

Specifyingspoilagecostsisjustasdifficult.

Voluntaryvs.InvoluntaryDBs
ComprehensiveVoluntaryDBProgram:
Requirestrainingandcooperationofstationcrews Identifypotentialvolunteersatcheckin Offerasmuchsoft compensationasneededto makethepassengerhappy

USairlinesverysuccessfulinmanagingDBs:
2007involuntaryDBratewas1.12per10,000 Over90%ofDBsinU.S.arevolunteers Goodtreatmentofvolunteersgeneratesgoodwill

FlightLegRevenueOptimization
Givenforafutureflightlegdeparture:
Totalbookingcapacityof(typically)thecoach compartment Severalfare(booking)classesthatsharethesame inventoryofseatsinthecompartment Forecastsoffuturebookingdemandbyfareclass Revenueestimatesforeachfare(booking)class

Objectiveistomaximizetotalexpected revenue:
Allocateseatstoeachfareclassbasedonvalue

Partitionedvs.SerialNesting
InapartitionedCRSinventorystructure,allocationsto eachbookingclassaremadeseparatelyfromalltheother classes. EXAMPLE(assuminguncertaindemand):
Giventhefollowingallocationsforeachof3classesY=30,B =40,M=70foranaircraftcoachcabinwithbookingcapacity =140. If31Ycustomersrequestaseat,theairlinewouldrejectthe 31strequestbecauseitexceedstheallocationfortheYclass Itispossiblethatairlinewouldrejectthe31stYclass customer,eventhoughitmightnothavesoldallofthe(lower valued)BorMseatsyet!

Underserialnestingofbookingclasses,theairlinewould neverturndownaYfarerequest,aslongasthereareany seats(Y,BorM)leftforsale.

SeriallyNestedBuckets

DeterministicSeatAllocation/Protection
Ifweassumethatdemandisdeterministic(orknownwith certainty),itwouldbesimpletodeterminethefareclass seatallocations
Startwithhighestfareclassandallocate/protectexactlythe numberofseatspredictedforthatclass,andcontinuewith thenextlowerfareclassuntilcapacityisreached.

EXAMPLE:3fareclasses(Y,B,M)
DemandforY=30,B=40,M=85 Capacity=140

Deterministicdecision:Protect30forY,40forB,and allocated70forM(i.e.,spill15Mrequests) NestedbookinglimitsY=140B=110M=70

EMSRbModelforSeatProtection: Assumptions
Basicmodelingassumptionsforserially nestedclasses:
demandforeachclassisseparateand independentofdemandinotherclasses. demandforeachclassisstochasticandcanbe representedbyaprobabilitydistribution lowestclassbooksfirst,initsentirety,followed bythenextlowestclass,etc. bookinglimitsareonlydeterminedonce(i.e., staticoptimizationmodel)

EMSRbModelCalculations
Becausehigherclasseshaveaccesstounused lowerclassseats,theproblemistofindseat protectionlevelsforhigherclasses,and bookinglimitsonlowerclasses Tocalculatetheoptimalprotectionlevels:
DefinePi(Si)=probabilitythatXi>Si, whereSiisthenumberofseatsmadeavailableto classi,Xiistherandomdemandforclassi

EMSRbCalculations(contd)
TheexpectedmarginalrevenueofmakingtheSth seatavailabletoclassiis:
EMSRi(Si)=Fi*Pi(Si)whereRiistheaveragerevenue(or fare)fromclassi

Theoptimalprotectionlevel,1forclass1fromclass 2satisfies:
EMSR1(1)=F1*P1(1)=R2

Once1isfound,setBL2=Capacity1. Ofcourse,BL1=Capacity(authorizedcapacityif overbooking)

ExampleCalculation
Considerthefollowingflightlegexample: Class MeanFcst. Std.Dev. Fare Y 10 3 1000 B 15 5 700 M 20 7 500 Q 30 10 350 TofindtheprotectionfortheYfareclass,we wanttofindthelargestvalueofYforwhich EMSRY(Y )=FY*PY(Y )>RB

Example(contd)
EMSRY(Y )=1000*PY(Y)>700PY(Y )>0.70 wherePY (Y )=probabilitythatXY>Y.

IfweassumedemandinYclassisnormally distributedwithmean,standarddeviation givenearlier,thenwecancreatea standardizednormalrandomvariableas(XY 10)/3.

ProbabilityCalculations
Next,weuseExcelorgototheStandardNormal CumulativeProbabilityTablefordifferent guesses forY.Forexample,
forY =7,Prob{(XY 10)/3>(10)/3}=0.8417 forY =8,Prob{(XY 10)/3>(10)/3}=0.7478 forY =9,Prob{(XY 10)/3>(10)/3}=0.639

So,wecanseethatY=8isthelargestinteger valueofYthatgivesaprobability>0.7and thereforewewillprotect8seatsforYclass!

NetworkRevenueManagement: OriginDestinationControl
Vastmajorityofworldairlinesstillpracticefare classcontrol:
Highyield(full)faretypesintopbookingclasses Loweryield(discount)faresinlowerclasses Designedtomaximizeyields,nottotalrevenues

Seatsforconnectingitinerariesmustbe availableinsameclassacrossallflightlegs:
Airlinecannotdistinguishamongitineraries Bottlenecklegscanblocklonghaulpassengers

YieldBasedFareClassStructure (Example)

ConnectingFlightNetworkExample

JFK

LH300 FRA

LH200

HKG

LH100 NCE

TheODControlMechanism
Revenuemaximizationoveranetworkof connectingflightsrequirestwostrategies:
1. Increaseavailabilitytohighrevenue,longhaul passengers,regardlessofyield; 2. Preventlonghaulpassengersfromdisplacing highyieldshorthaulpassengersonfullflights.

Revenuebenefitsof(1)outweighrisksof(2):
Probabilityofbothconnectingflightsbeing fullybookedislow,relativetootherpossible outcomes

WhatisODControl?
ThecapabilitytorespondtodifferentOD requestswithdifferentseatavailability. Canbeimplementedinavarietyofways:
Revenuevaluebuckets(greedyapproach) EMSRheuristicbidprice Displacementadjustedvirtualnesting Networkoptimal bidpricecontrol

Alloftheabovecanincreaserevenues,but eachonehasimplementationtradeoffs.

RevenueValueBucketConcept
Fixedrelationshipbetweenfaretypeand bookingclassisabandoned:
Bookingclasses(buckets)definedaccordingto revenuevalue,regardlessoffarerestrictions Eachitinerary/faretype(i.e..,ODF)assignedto arevenuevaluebucketoneachflightleg ODFseatavailabilitydependsonvaluebuckets

Valueconceptcanbeimplementedwithin existingclassesorthroughvirtual classes

ValueBucketImplementation
WithinExistingBookingClasses:
Farecodesneedtoberepublishedaccordingto revenuevalue;nochangestoinventorystructure DoesnotrequireseamlessCRSlinks,butcanbe confusingtotravelagentsandconsumers

DevelopmentofVirtualInventoryClasses:
Substantialcostofnewinventorystructureand mappingfunctionstovirtualclasses CRSseamlessavailabilitylinksareessential

VirtualClassMappingbyODFRevenueValue

Figure4.17

ValueBucketODControl
AllowsODcontrolwithexistingRMsystem:
Datacollectionandstoragebyleg/valuebucket Forecastingandoptimizationbyleg/valuebucket DifferentODFrequestsgetdifferentavailability

Butalsohaslimitations:
RebucketingofODFsdisturbsdataandforecasts Legbasedoptimization,notanetworksolution Cangivetoomuchpreferencetolonghaul passengers(i.e...,greedy approach)

DisplacementCostConcept
ActualvalueofanODFtonetworkrevenue onalegislessthanorequaltoitstotalfare:
Connectingpassengerscandisplacerevenueon downline(orupline)legs

Howtodeterminenetworkvalueofeach ODFforODcontrolpurposes?
Networkoptimizationtechniquestocalculate displacementcostoneachflightleg LegbasedEMSRestimatesofdisplacement

ValueBucketswithDisplacement
Givenestimateddownlinedisplacement, ODFsaremappedbasedonnetworkvalue:
NetworkvalueonLeg1=Totalfareminussum ofownlinelegdisplacementcosts Underhighdemand,availabilityforconnecting passengersisreduced,localsgetmoreseats

Revisionofdisplacementcostsisanissue:
Frequentrevisionscapturedemandchanges,but ODFremappingcandisruptbucketforecasts

AlternativeMechanism:BidPrice
Undervaluebucketcontrol,acceptODFifitsnetwork valuefallsintoanavailablebucket:
NetworkValue>ValueofLastSeatonLeg;or FareDisplacement>ValueofLastSeat

Samedecisionrulecanbeexpressedas: Fare>ValueofLastSeat+Displacement,or Fare>MinimumAcceptableBidPriceforODF BidPricesandValueBucketsaresimplytwodifferentO Dcontrolmechanisms.

ODBidPriceControl
Muchsimplerinventorycontrolmechanism thanvirtualbuckets: Simplyneedtostorebidpricevalueforeach leg EvaluateODFfarevs.itinerarybidpriceattime ofavailabilityrequest Mustrevisebidpricesfrequentlytoprevent toomanybookingsofODFsatcurrentbidprice Bidpricescanbecalculatedwithnetwork optimizationtoolsorlegbasedheuristics

Example:BidPriceControl
ABCD Givenlegbidprices BC:$240 CD:$160

AB:$35

AvailabilityforODrequestsBC: Available? Yes Yes No No

BidPrice=$240 Y $440 M $315 B $223 Q $177

AB:$35 BC:$240 AC BidPrice=$275 Y $519 M $374 B $292 Q $201 AD BidPrice=$435 Y $582 M $399 B $322 Q $249

CD:$160 Available? Yes Yes Yes No Available? Yes No No No

Networkvs.HeuristicModels
Estimatesofdisplacementcostsandbid pricescanbederivedusingeitherapproach:
MostODRMsoftwarevendorsclaimnetwork optimal solutionspossiblewiththeirproduct Mostairlineslackdetaileddataandface practicalconstraintsinusingnetwork optimizationmodels Stillsubstantialdebateamongresearchersabout whichnetworkODsolutionismostoptimal

Revenuegain,notoptimality,iscriticalissue