Dynamic Capacity Allocation for Optimal Revenue Management: A ULCC Data Driven Case Study

Abstract

In the airline industry revenue and inventory is managed tightly, with the intent to sell each seat at the right price to the right customer at the right time. This does not always go to plan and seats remain unsold, or demand can be greater than what is available. The question then becomes how can capacity and revenue be managed more efficiently? How can capacity and revenue be maximized to ensure that seat spoilage is minimized. This thesis takes a look at this problem and aims to solve this problem by dynamically allocating capacity as well as becoming paired with revenue management processes. By being able to move capacity around to different flights, it is believed that revenue can be maximized and that seat spoilage can be minimized, creating a more effective use of a perishable product. The goal of this thesis is to show that increases are possible, even if by small margins. This thesis looks to use real-world data to help support its findings along with a random distribution to pair alongside a Monte Carlo simulation to help ensure accuracy. In this data driven methodological approach revenue management and a capacity swapping algorithm are integrated. The revenue management module creates a series of seat inventory allocations as well as demand forecasting. This information is then fed into a simulation which will then simulate the entire booking life- cycle of a fight. Here each flight will build its passenger load and will swap aircraft with other aircraft of varying capacities when the algorithm has determined it is necessary and would create a positive increase in revenue and passenger counts. To assist in this approach a further random forest model is developed to help make informed decisions. These changes are further evaluated by the algorithm to ensure that every change that was made was beneficial and if so will accept the swap and continue to build loads as this new flight. Different case studies were developed that introduced different timing scenarios as well as different decision making tools. The two different decision making tools would use either the random forest model that was developed or a simple logic model that would look at estimated final revenue and estimated final passenger loads. The timing scenarios would look to see when swapping would be needed, whether it is a true daily swap or if swaps can be performed once a month. Ultimately there were positive results, with each scenario tested yielding positive increases in the three KPIs examined (Load Factor, Passengers, Revenue). Each scenario involved testing either the simple logic, or random forest model with varying swapping intervals. The best performing scenario was one where flights were allowed to be swapped daily using a random forest decision model. In this best scenario load factor saw an increase of 1%, the number of passengers increased 1.4%, and revenue increased 0.9%; all against the baseline scenario where zero flights were swapped. This translates into a 36,000 USD weekly increase for a small sample in a route network. Across a full route network, even greater increases can be achieved.