Airline Revenue Management with Segmented Continuous Pricing: Methods and Competitive Effects
With the introduction of IATA’s New Distribution Capability (NDC), airlines will no longer be limited to discrete fare classes for their fare distribution: they could be enabled show fare quotes in continuous ranges to the passengers. NDC will also allow airlines to present different fare quotes to...
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| Format: | Thesis |
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Massachusetts Institute of Technology
2022
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| Online Access: | https://hdl.handle.net/1721.1/144643 https://orcid.org/0000-0002-1010-0190 |
| Summary: | With the introduction of IATA’s New Distribution Capability (NDC), airlines will no longer be limited to discrete fare classes for their fare distribution: they could be enabled show fare quotes in continuous ranges to the passengers. NDC will also allow airlines to present different fare quotes to passengers from different demand segments as identified by the airline. In theory, airlines can better extract passenger willingness-to-pay, and thus see gains in revenue, by offering segmented continuous fare quotes to different passengers requesting to book.
This thesis explains the revenue management (RM) methods for segmented continuous pricing and examines their potential effects on airlines’ revenue through simulations in the Passenger Origin-Destination Simulator (PODS). We described two types of continuous pricing methods: class-based and classless. The class-based method is a straightforward extension from the traditional methods that can be used with existing RM systems, while the classless method requires more changes from current RM algorithms. Our initial simulation results indicate that airlines can see unrealistically large revenue gains assuming perfect passenger segment identification accuracy in a hypothetical competitive scenario where segmented continuous pricing is adopted simultaneously by all airlines. In the most realistic scenarios in which only one airline adopts segmented continuous pricing and has an 80% accuracy in identifying business versus leisure passenger booking requests, the first-mover airline sees a 3% to 6% revenue gain using constant segmented willingness-to-pay estimates. The revenue gains come primarily from the leisure passenger segment by offering lower fares than competitors closer to departure, although the first-mover airline loses bookings and revenues from the business passenger segment. We examine ways in which the first-mover airline can recover its revenue from business passengers and achieve a larger revenue gain by modifying its estimates of passenger willingness-to-pay.
This thesis also explores potential response strategies by the competing airlines. We discover that competitors can reverse the first-mover’s revenue gain by modifying their fare structures while still using traditional RM methods. We conclude that although adopting segmented continuous pricing is promising in theory, its actual gains depend heavily on the competitive situation and the responses made by other airlines. |
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