Revenue Management;
Review Journal of Pricing Model in Airlines
Muhammad Rayyan Haramain
Master of Management, Bakrie University, South Jakarta, Indonesia 12940; rayyan.haramain@gmail.com
Introduction
The last three decades, the technology of revenue
management has been used more and more widely
around the world and played a significant role in
improving the profits of corporations including
airlines segment. As a result, this field has attracted
much attention from scholars1–4. In the airline
industry, deciding the price for a product (i.e., the
ticket) is one of the major problems to be solved on
a daily basis and on airlines segment, the price that
is decided for the product will directly affect the
future demand of the product5. Product that offered
by the airlines is a finite number and have a limited
time period to which the decision is confined (cannot
be replenished and perishable).
Airlines segment, they often have to face two types
of customers that willing to buy their product: low-
valuation customers who accept low-fare product
only but willing to book in advance and high-
valuation customers who are willing to buy
expensive tickets but arrive just before the plane
takes off. The airlines usually cannot forecast the
demand from high-valuation customers with
certainty or trying to convince them to book/buy
earlier than the low-valuation customer. Thus,
airlines lose millions of dollars a year in potential
revenue; when low-fare booking displace higher
than expected high-fare bookings (cannibalization)
and when the airlines fly empty seats protected for
high-fare bookings that do not materialize
(spoilage)3.
Revenue management is about “selling the right
product, to the right costumers, at the right moment,
for the right channel with the best efficiency”5–7.
Because of that, there are so many study about how
to determine the revenue management’s strategy of
pricing product (ticket) in airlines segment. Thus,
the purpose of this review journals is to assess the
overall number of pricing model strategy in airlines
segment that published in general operational
management research journals and to examine the
design as well as the overall conclusions of the
pricing model strategy of airlines.
Literature Study
Business segment that can be used as model in
revenue management is business that fulfill some
condition, such as: (1) Relatively fixed capacity –
since the focus of revenue management is efficient
allocation of shared fixed capacity, it is only
appropriate for business which cannot quickly adapt
available capacity to available demand. For
example, if all seat of on a flight are occupied, the
plane cannot be enlarged, but it may be possible to
put the passenger on a later flight. For hotels, if all
rooms in a hotel are occupied, another room cannot
easily be added, although the customer may be
accommodated in a sister hotel in a different part of
the city.
(2) Ability to segment market – in order for a revenue
management program to be effective, the business
must segment its market into different types of
costumers. For example, the airline industry
distinguishes between time-sensitive and price-
sensitive customers by giving a discount if they
purchase the product (ticket) for a Saturday night
stay. Basically, the business must know which
costumers are most likely to use variously-priced
classes of service, and must develop different
marketing strategies for each market segment.
(3) Perishable inventory – One of the key factors
distinguishing service business from manufacturing
business is that the inventory is perishable. In the
case of capacity-constrained service business, the
problem is even more severe in that additional
capacity cannot be obtained. Seats unsold on an
airplane, room unsold in a hotel, or cars unrented at
a rental car agency all represent spoiled or wasted
inventory. If a business segment can minimize its
inventory spoilage, it will operate much more
effeciently.
(4) Product sold in advance – One of the capacity
management tools that service businesses use is a
reservation system in which units of inventory are
sold in advance of actual use. Reservations system
provide the business with some measure of security,
in that they know that their capacity will be used in
the future, but when the product is sold in advance,
the manager also faced with uncertainty. He/she
must decide whether to accept an early reservation
of a customer who wants low price, or wait and see
if higher paying customers will appear. With a good
revenue management system, this kind of situation
can be handled.

(5) Flutuacting demand – Many services business

face highly erratic demand patterns, and managers
must devise some method of dealing with
uncertainty. Revenue management system can be
used to help temper some of the demand fluctuations
by increasing utilization during slow demand times
(by decreasing price), and by increasing revenue
during times of high demand (by increasing price).
If a manager knows when demand peaks and valleys
will occur, he/she will be better able to plan for
them.

(6) Low marginal sales costs/high marginal capacity

change costs – For a revenue management system to
be effective, marginal sales costs, the cost of selling
an additional unit of inventory, must be low, but
marginal capacity change costs should be high. For
capacity-constrained business, providing additional
capacity is very expensive proposition, but selling
another unit of available capcity is relativity
inexpensive8–10.

Revenue management must address a myraid of

problem including: (1) Demand patterns –
Information on historical demand patterns for
various rate calsses must be available. Most of the
revenue management systems are based strictly on
historical demand patterns. Generally, in airlines
industries, demand is assumed to follow normal
distribution. In addition, information on the booking
pattern for each rate class must be obtained in order
to better undestand the behaviour of the different
customers. By obtaining this data, the managers can
better understand how many product that can be sold
to minimize the “cannibalization” and “spoilage”
that can be happened11,12.

to be effectiveasefjafj Using literature studies in the

process of making the conclusions and suggestions.
Literature is obtained through access to several
international journal sites such as: