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An effective dynamic decision policy for the revenue management of an airline flight

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  • Hung, Yi-Feng
  • Chen, Chien-Hao

Abstract

Airline companies normally classify the seats of a cabin class into a number of fare classes. Customers of different fare classes arrive randomly during the booking horizon. Every time a customer in a certain fare class arrives, the airline company must decide promptly whether to fulfill or reject the request. To increase revenues, the airline company may reject certain lower-fare class customer requests and reserve the seats for future higher-fare class customers. However, rejecting too many lower-fare class customers may result in empty seats when the flight takes off. Given the multiple fare classes of a flight and the non-homogeneous Poisson customer arrival process in each fare class, and with the aim of maximizing the revenue of the flight, this study develops and tests two heuristic approaches – the dynamic seat rationing (DSR) decision policy and the expected revenue gap (ERG) decision policy – to help the airline make a fulfillment-or-rejection decision when a customer arrives. The simulation experiments show that ERG performs best among all tested approaches and, on average, the revenue from the ERG being merely 0.8% less than that of the optimal decision made with perfect information. Moreover, the ERG is very robust under various problem conditions.

Suggested Citation

  • Hung, Yi-Feng & Chen, Chien-Hao, 2013. "An effective dynamic decision policy for the revenue management of an airline flight," International Journal of Production Economics, Elsevier, vol. 144(2), pages 440-450.
    • Handle: RePEc:eee:proeco:v:144:y:2013:i:2:p:440-450
    DOI: 10.1016/j.ijpe.2013.03.012
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    References listed on IDEAS

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    Cited by:

    1. Gönsch, Jochen & Koch, Sebastian & Steinhardt, Claudius, 2014. "Revenue management with flexible products: The value of flexibility and its incorporation into DLP-based approaches," International Journal of Production Economics, Elsevier, vol. 153(C), pages 280-294.
    2. Xie, Wenming & Jiang, Zhibin & Zhao, Yingxue & Hong, Junjie, 2014. "Capacity planning and allocation with multi-channel distribution," International Journal of Production Economics, Elsevier, vol. 147(PA), pages 108-116.

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