Routing Considerations in Airline Yield Management

Abstract

The airline yield management problem considers how to allocate capacity to the different fare classes so that the airline’s revenue is maximized. In the traditional airline yield management problem it is assumed that customers specify their itineraries, i.e., flight sequences. In the context of cargo airline yield management and in the context of a low fare search, customers specify only the origin and destination of their travel, a price and a time window for the travel. When the demand is origin and destination specific, the airline yield management problem not only must decide which requests to accept versus reject, as in itinerary specific demand, but must also solve the routing problem for each accepted booking request.

With regard to price-driven passengers, airlines are interested in keeping these customers away from itineraries that are preferred by those who are willing to pay higher fares. A routing algorithm that is tailored towards these objectives must take into account actual costs as well as some kind of toll representing opportunity cost. We present a fast routing algorithm that is tailored towards the special structure of airline networks to do the route generation.

For the airline yield management problem, we discuss extensions of three approaches for itinerary specific demand to handle origin and destination specific demand. Two approaches are bid price methods, one based on a deterministic network model and one based on a stochastic network model, and the third uses an approximation of the value function in a Markov decision problem formulation of the airline yield management problem.

Finally, a comparison is presented between first-come-first-serve and bid-pricing based on the deterministic network model, using a flight network extracted from the network of a major domestic carrier. The stations are connected through 48 flight legs, with alternate routes for most station pairs. The bid pricing approach results in revenue increases between 7.2% and 28.63%.