Innovative revenue management technique earns airline industry acclaim

Thomas Fiig

Chief Scientist, Amadeus IT Group

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Since the emergence of revenue management nearly 40 years ago, its objective of maximising airline revenue by optimising the price of seats has remained unchanged. Hence, one would think that after all this time we would have perfected the discipline.

airline revenue

On one hand, several important revenue management problems remain unsolved today despite years of effort. On the other, new revenue management challenges arise due to the constant evolution of the airline business model.

At this year’s AGIFORSAirline Revenue Management Conference in Frankfurt, there were several presentations from industry players on some of the classic unresolved revenue management problems, including cross-cabin sharing, Alliance Revenue Management, Forecasting, and Overbooking. Also, there were several presentations of new revenue management challenges that arise from airlines evolving from being operators (selling seats) to becoming merchants where they sell a wider offer that enhances the travel experience, which require new RM and distribution techniques capable of dynamic offer construction and dynamic pricing.

I had the opportunity to present the results of our research on joint overbooking and seat allocation for the fare family environment, in collaboration with Nicolas Bondoux from the Amadeus Innovation & Research department and the Technical University of Denmark (DTU).

As it stands today, overbooking is solved separately from the seat allocation problem. Overbooking is managed by inflating the authorisation levels obtained from seat allocation by various methods. This simplification, although less than optimal, has been the practice since the birth of revenue management. Revenue management was constructed this way out of a necessity, because computational complexity prohibited solving the ‘correct’ optimisation problem.

During our presentation, we elaborated on how we solved the combined seat allocation and overbooking problem for fare family fare structures, the prevalent fare structure today, by transforming the optimisation problem to an equivalent independent demand model, thereby avoiding the computational complexity that prevented this problem from being solved. Simulations showed that this model delivers significant revenue gains of 1% - 3% by balancing volume and yield.

Our presentation was awarded ‘Best technical presentation’ and our research has since been acknowledged by the airline community as a major step forward in revenue management, further highlighting our dedication to innovation and research. This is the third time in a row that Amadeus Revenue Management system research has been awarded at AGIFORS, the first being for our Demand Forecasting and Measuring Forecast Accuracy in Simplified Fare Structures research in 2014, and the second time for Dynamic Pricing research in 2015.