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SO - PGP18 - 20 - Class 4

- Airlines use revenue management to set differential prices for different customer segments like business travelers and vacationers to maximize profit from a limited number of seats. - They set higher prices for segments less sensitive to price like business travelers and discount prices for advance bookings to encourage early reservations from price-sensitive segments. - The optimal prices balance generating maximum revenue from each segment without allowing lower-paying segments to utilize all available seats. - Capacitated pricing models add the constraint of total capacity to determine prices that maximize total profit within the seat limit.

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swathi kiran kumar DODDI
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41 views12 pages

SO - PGP18 - 20 - Class 4

- Airlines use revenue management to set differential prices for different customer segments like business travelers and vacationers to maximize profit from a limited number of seats. - They set higher prices for segments less sensitive to price like business travelers and discount prices for advance bookings to encourage early reservations from price-sensitive segments. - The optimal prices balance generating maximum revenue from each segment without allowing lower-paying segments to utilize all available seats. - Capacitated pricing models add the constraint of total capacity to determine prices that maximize total profit within the seat limit.

Uploaded by

swathi kiran kumar DODDI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Delivery planning – Airline scheduling

Consistent
Banked schedule
arrival/departure
Operating ▪ Shorter connection time Rate of arrival and
philosophy (Several banks) department is spread rather
▪ Within a small-time window evenly
aircrafts arrive & leave

▪ More resources required • Lesser resources as


(Equipment, people, resources can be used
Cost of operations gate) continuously
▪ Airlines need to pay • More suitable for budget
even for the down time airlines

Asset utilization Lesser utilization


Better utilization

Risk of
Higher Lower
disruptions/delays
Delivery planning – Airline scheduling
What is a scissor hub?
❑Different flights to a hub arriving within a small-time
window and onboarded to destinations from that hub

❑ (Mumbai, Ahmedabad, Delhi) to (Chicago, New York,


Newark)

Implications for fleet


maintenance??

❑ To ensure connection at the right time, airlines leave


aircraft in lower wage countries for maintenance runs
Revenue management
Is the use of pricing to increase the profit generated from a
limited assets.
Revenue management has a significant impact on supply
chain profitability when following conditions exists.
❑ The value of product varies in different market segments –
Business travelers vs. Vacationers
❑ The product is perishable – Perishable commodity of seats

❑ Demand has seasonality and other peaks – Hotel rooms

❑ Services sold in advance


Whether to accept early reservation at a discounted price or
keep the inventory for high paying customer
Significance of revenue management for multiple
customer segments

❑ How can the firm differentiate between the two segments


and structure its pricing to make one segment pay more
than the other?

❑ How can the firm control demand such that lower-paying


segment does not utilize the entire availability of asset?
Traditional pricing
Total Revenue = PQ
Price Demand Curve

Seats
P Available

Quantity
Q
Key assumption assumption
- Demand elasticity
- Does not consider inelasticity in demand (business traveler traveling
last minutes)
Certain class of differential fares in Airlines

✓ Full coach: Tickets can be purchased any time and


hence fully refundable. In some case tickets can be
rescheduled as well without additional cost.

✓ Advance purchase: Must be purchased 2 weeks in


advance and is not refundable.

✓ Internet special: Offered when flight is not


expected to be full and are not refundable.
- Loss at a discounted rate.
Pricing for multiple segments (Uncapacitated model)
Demand di = (Ai – Bi pi)

Cost per unit is c

Service provider would want to maximize the profitability


K
Profitability =  ( pi − c)  ( Ai − Bi pi )
i =1
Where K is the total number of segments

Ai c
Optimal price pi = +
2 Bi 2
Example

d1 = (5000 – 20 p1); d2 = (5000 – 40 p2)


c = Rs. 10

Ascertain p1 and p2 and total profit?

Rs. 130, Rs. 67.5 & Rs. 420,250

The same can be verified using the solver


Fitting into a single segment
What would have been the price, if we had artificially forced
the two segments into a single segment (single price) and
what impact it would have on the profit?

d1 = (5000 – 20 p1); d2 = (5000 – 40 p2)


c = Rs. 10

Resulting demand curve?


Capacitated pricing model
What is going to be the structure of capacitated pricing model?
Demand di = (Ai – Bi pi)
Cost per unit is c; K is the total number of segments

Q is the total capacity available

K
Max[ ( pi − c )  ( Ai − Bi pi )]
i =1
st.
K
 ( Ai − Bi pi )  Q
i =1
Ai − Bi pi  0
d1 = (5000 – 20 p1); d2 = (5000 – 40 p2)

c = Rs. 10

Q = 4000

Ascertain p1 and p2
How airlines price flights

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