Pricing and demand management of air tickets using a multiplicative newsvendor model

Abstract

As each day passes by, the number of flights expands and the need for travel quality services continues to grow. In consequence, for an airline to remain in market, better revenue management is required such that the same quality of service is offered at reasonable prices. Since cost cut plans may be disrupted by the need to uphold quality of service, demand and sales management plans can be one of the best techniques for the management of revenues in airlines. To excel in providing safe and most comfortable flights at sensible prices, airlines should objectively employ advanced techniques to reduce the costs and maximize the earnings, which can be achieved via seat allocation and pricing of different classes. Toward achieving such an objective, in this work, we seek to find the best prices of two different seating classes. Here, two economy classes are considered for pricing and quantification, where the optimal number of seats of each class is expressed in a closed form and the prices that will maximize the size of sales are computed accordingly. Using a multiplicative demand model and the newsvendor approach, the best discount rates and the optimal number of seats could be found. The proposed model is tested using real flight data; it was found that for a normally distributed demand, the sales can be increased by allocating the right number of seats for both the regular and the discount seats. Not only the prices can maximize the sales, specific discount ratios were found to improve the sales too. The model can assist revenue managers to increase the sales via the right selection of the number of economy seats and prices.