Efficient formulations for next-generation choice-based network revenue management for airline implementation

Revenue management is at the core of airline operations today; proprietary algorithms and heuristics are used to determine prices and availability of tickets on an almost-continuous basis. While initial developments in revenue management were motivated by industry practice, later developments overcoming fundamental omissions from earlier models show significant improvement, despite their focus on relatively esoteric aspects of the problem, and have limited potential for practical use due to computational requirements. This dissertation attempts to address various modeling and computational issues, introducing realistic choice-based demand revenue management models. In particular, this work introduces two optimization formulations alongside a choice-based demand modeling framework, improving on the methods that choice-based revenue management literature has created to date, by providing sensible models for airline implementation.

The first model offers an alternative formulation to the traditional choice-based revenue management problem presented in the literature, and provides substantial gains in expected revenue while limiting the problem’s computational complexity. Making assumptions on passenger demand, the Choice-based Mixed Integer Program (CMIP) provides a significantly more compact formulation when compared to other choice-based revenue management models, and consistently outperforms previous models.

Despite the prevalence of choice-based revenue management models in literature, the assumptions made on purchasing behavior inhibit researchers to create models that properly reflect passenger sensitivities to various ticket attributes, such as price, number of stops, and flexibility options. This dissertation introduces a general framework for airline choice-based demand modeling that takes into account various ticket attributes in addition to price, providing a framework for revenue management models to relate airline companies’ product design strategies to the practice of revenue management through decisions on ticket availability and price.

Finally, this dissertation introduces a mixed integer non-linear programming formulation for airline revenue management that accommodates the possibility of simultaneously setting prices and availabilities on a network. Traditional revenue management models primarily focus on availability, only, forcing secondary models to optimize prices. The Price-dynamic Choice-based Mixed Integer Program (PCMIP) eliminates this two-step process, aligning passenger purchase behavior with revenue management policies, and is shown to outperform previously developed models, providing a new frontier of research in airline revenue management.