A Tutorial on Optimization in the Context of Perishable-Asset Revenue Management Problems for the Airline Industry

Abstract

This paper provides a tutorial on the subject of perishable-asset revenue management, which is a term given to a field that combines the more familiar areas in the airline industry of yield management, overbooking, and pricing. The paper also provides a comprehensive taxonomy with 15 different dimensions (elements) along which problems that are included in this important research area can be classified. A review of the basic seat allocation decision on how many seats to sell in each fare class is given. Several commonly used overbooking algorithms and decision rules for customer diversion are discussed. Finally, two complex, yet fruitful, areas of research (approaches that consider the entire flight network and approaches that attempt to determine an optimal price) are presented.We think it would be valuable to have a basic tutorial on the subject of Perishable-Asset Revenue Management (PARM) — often called yield management or revenue management—published to provide for the readers of this book a basic overview on the subject.To begin, we will discuss the definition and revised taxonomy of Perishable Asset Revenue Management problems. A review of the basic seat allocation decision on how many seats to sell in each fare class will follow. Next, we will show several commonly used overbooking algorithms and the decision rules for customer diversion (what is commonly known in the industry as “selling-up” or “traning-up”. Finally, we will look at two complex, yet fruitful, areas of PARM research, namely: a) approaches that condider the entire flight network (e.g., origins and destinations) as opposed to only a single flight leg, and b) approaches of letting the price analyst determine the fares to charge for the different fare classes,