Revenue Management In Airline Industry

After the deregulations in the airline industry, the revenue management techniques have become inevitable for airline seat inventory control. Revenue management is the process of selling the limited perishable capacity to the right customers at the right prices so as to optimize the total revenue. Classic examples of RM can be found in the airline and hotel industry where there are finite number of seats and hotel rooms, respectively (Mou and Wang 2014). The main problem in airline revenue management is to determine booking control strategies. Airlines seldom charge the same fare for each seat on a flight, but instead price seats based on customer’s willingness-to-pay. In fact, they segment the passengers into various subsets of customers with

However, most airlines have chosen network structures which causes the network version problem of revenue management to receive much interest as the flight legs are now shared by multiple origin-destination itineraries. Two network structures that have received particular attention in studies of the airline industry are hub-and-spoke networks and point-to-point networks. The hub-and-spoke network problem deals with locating hub facilities and allocating demand nodes to hubs to direct the flow between origin–destination pairs with less number of required links. In contrast, in a point to-point network, all cities are connected with each other through non-stop flights. In fact, route architecture is the foundation of an airline's product. Point-to-point (non-stop) and hub-and-spoke architectures lie at the poles of a continuum with most airlines operating some combination of the two. All passengers in a point-to-point system board at flight origin and deplane at the destination. In the hub and spoke system, by contrast, all passengers except those whose origin or destination is the hub, transfer at the hub for a second flight to their

Non-stop flights reduce total travel time, primarily by eliminating the intermediate stops, but also by avoiding circuitous routings and increasing aircraft block speeds. Passengers value the reduction in travel time. Airlines can generate more revenue by charging higher fare for direct flights. (Cook and Goodwin, 2008). Also, some airport hubs cannot consolidate traffic bound for many itineraries. Having this limitation and knowing the fact that some passengers prefer non-stop flights, consideration of both hub-stop and non-stop routing strategies can be more cost-efficient than a pure hub-and-spoke network (Jeng 1987). In other words, non-stop flights are always the most desirable in terms of convenience but on the other hand less desirable in terms of price for price sensitive customers. Moreover, the stops at the hub airports increase the expenses for the airline companies due to the facility charges and landing fees. Therefore, the airlines can generate more revenue by considering these key parameters and applying best network routing