IDEAS home Printed from https://ideas.repec.org/a/eee/jaitra/v75y2019icp92-102.html
   My bibliography  Save this article

The airfare pricing and seat allocation problem in full-service carriers and subsidiary low-cost carriers

Author

Listed:
  • Ko, Young Dae

Abstract

This study investigates the competitive market situation in the air transport industry considering full-service carriers (FSC), subsidiary low-cost carriers (LCC) and rival LCCs on the flight-leg level while subsidiary LCCs are established by FSCs against rival LCCs to keep the market share and to make more profit. It is assumed that the demand of economy class for each airline follows a known distribution, and the mean value of that distribution is a function of its airfare and the airfare differences with other airlines. In addition, no-shows and cancellations are introduced to reflect a real situation. Based on this situation, a mathematical model is developed to derive efficient airfare pricing and seat allocation for each airline for maximizing the profit sum of both FSCs and subsidiary LCCs using a repeated game. A repeated game model integrated with a Tabu search algorithm and an EMSR based heuristic is suggested to deal with the proposed repeated game. A numerical example is provided to validate the model and solution procedure with hypothetical system parameter values under two kinds of market situations that show before and after the emergence of subsidiary LCCs.

Suggested Citation

  • Ko, Young Dae, 2019. "The airfare pricing and seat allocation problem in full-service carriers and subsidiary low-cost carriers," Journal of Air Transport Management, Elsevier, vol. 75(C), pages 92-102.
    • Handle: RePEc:eee:jaitra:v:75:y:2019:i:c:p:92-102
    DOI: 10.1016/j.jairtraman.2018.12.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0969699717305434
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jairtraman.2018.12.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Peter P. Belobaba, 1987. "Survey Paper---Airline Yield Management An Overview of Seat Inventory Control," Transportation Science, INFORMS, vol. 21(2), pages 63-73, May.
    2. Serguei Netessine & Robert A. Shumsky, 2005. "Revenue Management Games: Horizontal and Vertical Competition," Management Science, INFORMS, vol. 51(5), pages 813-831, May.
    3. Pai, Vivek, 2010. "On the factors that affect airline flight frequency and aircraft size," Journal of Air Transport Management, Elsevier, vol. 16(4), pages 169-177.
    4. Oliveira, Alessandro V.M. & Huse, Cristian, 2009. "Localized competitive advantage and price reactions to entry: Full-service vs. low-cost airlines in recently liberalized emerging markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 45(2), pages 307-320, March.
    5. Homsombat, Winai & Lei, Zheng & Fu, Xiaowen, 2014. "Competitive effects of the airlines-within-airlines strategy – Pricing and route entry patterns," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 63(C), pages 1-16.
    6. Richard, Oliver, 2003. "Flight frequency and mergers in airline markets," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 907-922, June.
    7. Morrell, Peter, 2005. "Airlines within airlines: An analysis of US network airline responses to Low Cost Carriers," Journal of Air Transport Management, Elsevier, vol. 11(5), pages 303-312.
    8. Dennis, Nigel, 2007. "End of the free lunch? The responses of traditional European airlines to the low-cost carrier threat," Journal of Air Transport Management, Elsevier, vol. 13(5), pages 311-321.
    9. Windle, Robert & Dresner, Martin, 1999. "Competitive responses to low cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(1), pages 59-75, March.
    10. Fred Glover, 1990. "Tabu Search: A Tutorial," Interfaces, INFORMS, vol. 20(4), pages 74-94, August.
    11. S. L. Brumelle & J. I. McGill & T. H. Oum & K. Sawaki & M. W. Tretheway, 1990. "Allocation of Airline Seats between Stochastically Dependent Demands," Transportation Science, INFORMS, vol. 24(3), pages 183-192, August.
    12. Belobaba, Peter P. & Wilson, John L., 1997. "Impacts of yield management in competitive airline markets," Journal of Air Transport Management, Elsevier, vol. 3(1), pages 3-9.
    13. Mahmut Parlar, 1988. "Game theoretic analysis of the substitutable product inventory problem with random demands," Naval Research Logistics (NRL), John Wiley & Sons, vol. 35(3), pages 397-409, June.
    14. S. L. Brumelle & J. I. McGill, 1993. "Airline Seat Allocation with Multiple Nested Fare Classes," Operations Research, INFORMS, vol. 41(1), pages 127-137, February.
    15. Fred Glover, 1989. "Tabu Search---Part I," INFORMS Journal on Computing, INFORMS, vol. 1(3), pages 190-206, August.
    16. Whyte, Randall & Lohmann, Gui, 2015. "The carrier-within-a-carrier strategy: An analysis of Jetstar," Journal of Air Transport Management, Elsevier, vol. 42(C), pages 141-148.
    17. Pearson, James & Merkert, Rico, 2014. "Airlines-within-airlines: A business model moving East," Journal of Air Transport Management, Elsevier, vol. 38(C), pages 21-26.
    18. Renwick E. Curry, 1990. "Optimal Airline Seat Allocation with Fare Classes Nested by Origins and Destinations," Transportation Science, INFORMS, vol. 24(3), pages 193-204, August.
    19. Morrison, Steven A & Winston, Clifford, 1990. "The Dynamics of Airline Pricing and Competition," American Economic Review, American Economic Association, vol. 80(2), pages 389-393, May.
    20. Lin, Ming Hsin, 2012. "Airlines-within-airlines strategies and existence of low-cost carriers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(3), pages 637-651.
    21. Gillen, David & Gados, Alicja, 2008. "Airlines within airlines: Assessing the vulnerabilities of mixing business models," Research in Transportation Economics, Elsevier, vol. 24(1), pages 25-35.
    22. Swan, William M. & Adler, Nicole, 2006. "Aircraft trip cost parameters: A function of stage length and seat capacity," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 42(2), pages 105-115, March.
    23. Ko, Young Dae, 2016. "An airline's management strategies in a competitive air transport market," Journal of Air Transport Management, Elsevier, vol. 50(C), pages 53-61.
    24. Daraban, Bogdan & Fournier, Gary M., 2008. "Incumbent responses to low-cost airline entry and exit: A spatial autoregressive panel data analysis," Research in Transportation Economics, Elsevier, vol. 24(1), pages 15-24.
    25. Graf, Luca, 2005. "Incompatibilities of the low-cost and network carrier business models within the same airline grouping," Journal of Air Transport Management, Elsevier, vol. 11(5), pages 313-327.
    26. Peter P. Belobaba, 1989. "OR Practice—Application of a Probabilistic Decision Model to Airline Seat Inventory Control," Operations Research, INFORMS, vol. 37(2), pages 183-197, April.
    27. Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, vol. 53(4), pages 905-922, July.
    28. Fu, Xiaowen & Dresner, Martin & Oum, Tae H., 2011. "Effects of transport service differentiation in the US domestic airline market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 47(3), pages 297-305, May.
    29. Steven A. Lippman & Kevin F. McCardle, 1997. "The Competitive Newsboy," Operations Research, INFORMS, vol. 45(1), pages 54-65, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dalalah, Doraid & Ojiako, Udechukwu & Chipulu, Maxwell, 2020. "Voluntary overbooking in commercial airline reservations," Journal of Air Transport Management, Elsevier, vol. 86(C).
    2. Doraid Dalalah & Mohammad Khasawneh & Sharafuddin Khan, 2022. "Pricing and demand management of air tickets using a multiplicative newsvendor model," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(5), pages 517-528, October.
    3. Ko, Young Dae & Kwag, Sung Il & Oh, Yonghui, 2020. "An efficient airline seat reallocation algorithm considering customer dissatisfaction," Journal of Air Transport Management, Elsevier, vol. 85(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Kun & Tsui, Wai Hong Kan & Li, Lan-Bing & Lei, Zheng & Fu, Xiaowen, 2020. "Entry pattern of low-cost carriers in New Zealand - The impact of domestic and trans-Tasman market factors," Transport Policy, Elsevier, vol. 93(C), pages 36-45.
    2. Zhang, Yahua & Sampaio, Breno & Fu, Xiaowen & Huang, Zhibin, 2018. "Pricing dynamics between airline groups with dual-brand services," Transportation Research Part A: Policy and Practice, Elsevier, vol. 112(C), pages 46-59.
    3. Ng, Kam To & Fu, Xiaowen & Hanaoka, Shinya & Oum, Tae Hoon, 2022. "Japanese aviation market performance during the COVID-19 pandemic - Analyzing airline yield and competition in the domestic market," Transport Policy, Elsevier, vol. 116(C), pages 237-247.
    4. Nokhaiz Tariq Khan & Javed Aslam & Ateeq Abdul Rauf & Yun Bae Kim, 2022. "The Case of South Korean Airlines-Within-Airlines Model: Helping Full-Service Carriers Challenge Low-Cost Carriers," Sustainability, MDPI, vol. 14(6), pages 1-19, March.
    5. Jeffrey I. McGill & Garrett J. van Ryzin, 1999. "Revenue Management: Research Overview and Prospects," Transportation Science, INFORMS, vol. 33(2), pages 233-256, May.
    6. Serguei Netessine & Robert A. Shumsky, 2005. "Revenue Management Games: Horizontal and Vertical Competition," Management Science, INFORMS, vol. 51(5), pages 813-831, May.
    7. Syed Asif Raza & Rafi Ashrafi & Ali Akgunduz, 2020. "A bibliometric analysis of revenue management in airline industry," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(6), pages 436-465, December.
    8. Homsombat, Winai & Lei, Zheng & Fu, Xiaowen, 2014. "Competitive effects of the airlines-within-airlines strategy – Pricing and route entry patterns," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 63(C), pages 1-16.
    9. You, Peng-Sheng, 2001. "Airline seat management with rejection-for-possible-upgrade decision," Transportation Research Part B: Methodological, Elsevier, vol. 35(5), pages 507-524, June.
    10. Mihai Banciu & Fredrik Ødegaard & Alia Stanciu, 2019. "Distribution-free bounds for the expected marginal seat revenue heuristic with dependent demands," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(2), pages 155-163, April.
    11. Su, Min & Luan, Weixin & Fu, Xiaowen & Yang, Zaili & Zhang, Rui, 2020. "The competition effects of low-cost carriers and high-speed rail on the Chinese aviation market," Transport Policy, Elsevier, vol. 95(C), pages 37-46.
    12. William L. Cooper & Diwakar Gupta, 2006. "Stochastic Comparisons in Airline Revenue Management," Manufacturing & Service Operations Management, INFORMS, vol. 8(3), pages 221-234, February.
    13. Chiambaretto, Paul & Combe, Emmanuel, 2023. "Business model hybridization but heterogeneous economic performance: Insights from low-cost and legacy carriers in Europe," Transport Policy, Elsevier, vol. 136(C), pages 83-97.
    14. Wang, Yixiao & Sun, Luoyi & Teunter, Ruud H. & Wu, Jianhong & Hua, Guowei, 2020. "Effects of introducing low-cost high-speed rail on air-rail competition: Modelling and numerical analysis for Paris-Marseille," Transport Policy, Elsevier, vol. 99(C), pages 145-162.
    15. Fageda, Xavier, 2014. "What hurts the dominant airlines at hub airports?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 177-189.
    16. Zuidberg, Joost, 2019. "Network geographies and financial performances in low-cost carrier versus network carrier competition: The case of Norwegian versus SAS," Journal of Transport Geography, Elsevier, vol. 79(C), pages 1-1.
    17. Popovic, Jovan & Teodorovic, Dusan, 1997. "An adaptive method for generating demand inputs to airline seat inventory control models," Transportation Research Part B: Methodological, Elsevier, vol. 31(2), pages 159-175, April.
    18. Zhu, Chenbo & Hu, JianQiang, 2020. "Revenue management games with government mandate," Omega, Elsevier, vol. 93(C).
    19. Wang, Xiubin & Regan, Amelia, 2006. "Dynamic yield management when aircraft assignments are subject to swap," Transportation Research Part B: Methodological, Elsevier, vol. 40(7), pages 563-576, August.
    20. Yigao Liang, 1999. "Solution to the Continuous Time Dynamic Yield Management Model," Transportation Science, INFORMS, vol. 33(1), pages 117-123, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaitra:v:75:y:2019:i:c:p:92-102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/journal-of-air-transport-management/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.