Airline Revenue Management Case Study

3177 Words 13 Pages
Vol. 9, No. 3, May 2009, pp. 135–139 issn 1532-0545 09 0903 0135



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Examples include the text and exercises in Netessine and Shumsky (2002) and Chapter 13 of Cachon and Terwiesch (2006). These introductory texts use a newsvendor argument to find the optimal protection or overbooking level for a single flight leg with two distinct fare classes. Typical exercises apply the newsvendor-style formula to this canonical airline problem as well as to similar problems faced by hotels and purveyors of media advertising slots. Real-world applications of revenue management, however, are not limited to the use of the newsvendortype formula. The cases described here allow novice students to solve more complex problems by taking advantage of the quantitative tools—forecasting, simulation, and optimization—that students acquire during the early stages of many business programs. In addition, use of these cases helps to give the tools themselves more credibility because real-world revenue managers develop and use optimization and simulation models built on the same core principles (although, of course, industrial-strength applications are usually much …show more content…
2006). The students are given a simulation model that incorporates buy-down behavior, BlueSky Single-Leg C .xls2 ), but are told to use the simple newsvendorstyle formula (with its assumption that customers do not buy down) to calculate protection levels. The students use the model to generate revenue predictions and forecasts of high-fare demand. These forecasts are then used to update the protection levels, and the simulation is run again. If done correctly, protection levels drop far below the optimum, and revenue is lost. The case discussion focuses on why the spiral-down effect occurs in practice and what can be done about it. 4.1.2. How the Cases Can Be Assigned and Used in Class. BlueSky Airlines: Single-Leg Revenue Management (A) may be used as a stand-alone case. When using all three cases, I have assigned the (A) and (B) Cases in advance of class. Class time is then spent discussing these two cases and working through the (C) Case. 4.2. Case Series: BlueSky Airlines: Network Revenue Management 4.2.1. Summary of Case Contents (A) Case: This case describes a small hub and spoke network with three flights into the hub connecting to three flights out of the hub. Given the capacities, revenues, and deterministic demands on all possible itineraries in the network, the students formulate a linear programming model to determine how capacity should be partitioned among customers. This approach—using a deterministic linear program to

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