You are on page 1of 7

LJ Institute of Management Studies (IMBA)

Topic: Pricing and Revenue Management: Capacity Allocation in Airlines


Sem: 8
Subject: Supply Chain Management
Submitted To: Susmita Ma’am
Submitted By: Drashti Patel (83)
Hardik Patel (85)
Sachin shah (94)
Revenue management

The traditional approach involves hierarchical decision making


● Marketing function makes decisions on pricing and other marketing variables and
supply chain function makes relevant supply chain decisions.

In limited supply situation, it is important to make integrated decisions where pricing


decisions in particular and overall marketing decisions, in general, should factor in limited
supply availability.

● Supply is limited by the available capacity in perishable products or service situations.


Since one can not store perishable products and services, the capacity of the plane or
a hotel or a truck restricts the supply position in these businesses.
● Supply is limited by available inventory in long lead time supply situations. The ability
to handle demand is constrained by the fact that the supplier needs a long lead-time
and, within that period the firm has to manage with the inventory available at hand.
● Under conditions of limited supply, the bulk of the capacity and supply-related costs
have already been incurred and consequently, revenue management attempts to
make optimal pricing decision so that the firm can generate the highest possible
revenue so as to generate the highest possible profit.

Revenue management is a business practice that enables companies to maximize revenues


by controlling the inventory levels and pricing of perishable products. Revenue management
has been successfully adopted in the airlines for several years. It enabled airlines to improve
their revenues from selling seats by stratifying and segmenting their markets. In recent years,
industries like cruise lines, trucking, amusement parks. hotels, broadcasters, internet service
providers, golf courses and car rentals have adopted revenue management as a tool to
increase revenues.

Differential Pricing
It refers to the determination of prices for each fare class ticket such that the total revenue
generated is maximized. Pricing of tickets has a direct impact on revenues. It depends on
factors like competitors prices, demand. time remaining till departure and remaining seat
inventory.
Seat Inventory Control
It refers to the determination of optimal booking limits for the seats in each class such that
the total revenue generated is maximized. It is entirely under the control of the management.
Although price remains a major concern in seat inventory control, fares of classes are
predetermined and are treated as an exogenous factor. Seat inventory control is generally
controlled by the airline management.

Integration of Pricing and Seat Allocation


In seat inventory control the prices of the fare classes are assumed to be known. Though in
reality, the price keeps on changing throughout the booking horizon. In order to account for
the changing prices, pricing and seat allocation decisions should be taken simultaneously.
This is known as the integration of pricing and seat allocation.

Looking for flights can be great fun, especially when you land a good deal. But sometimes it’s
rather frustrating. You spend hours on the internet, trying different websites, but reasonable
fares are nowhere to be found. Instead, you see prices which are double what you’ve paid
before, or you remember a friend just bought that flight for hundreds less.

Airlines first determine the type of plane they will use for a flight, and this tells them how
many seats are in each travel class. While a travel class indicates the quality of class (First,
Business, Premium Economy or Economy), a booking class refers to the type of ticket.

Each booking class has different rules and restrictions. The cost of changing or refunding a
ticket can vary widely, some can only be booked if your flight is more than 14 days away or
only on weekdays, and sometimes you earn more frequent flyer miles (or none at all).

Each booking class has a different price based on these factors. And although there may be
100 seats in Economy, there may only be 10 seats in each different fare bucket. Online sites
like Expedia.com and Kayak.com, will show you the cheapest booking class available that
matches all of your criteria.
The reason for all these booking classes is that airlines try to maximize their profit. They
know that there are mainly two types of travelers: leisure travelers and business travelers.
They both need flights but their buying behavior is quite different.

While the leisure traveler is (generally) more flexible with dates, business travelers have to
travel on a certain day and often at a certain time. Leisure travelers tend to book well in
advance giving them time to plan their trip, therefore they buy up the cheaper booking
classes.

Business travelers have to leave quite spontaneously sometimes and are willing to pay more
for a ticket in order to make it to their meeting. As we get closer to the departure date, there
are only seats in the higher, more expensive booking classes available.

Why do prices change?


Prices change due to seat availability and demand. The cheaper booking classes might be
sold out even if there's still 3 months before you leave.

There are some dates of the year where there is simply higher demand. When a lot of people
have to fly somewhere (and even more when they want to go to the same destination or
area), airlines will set their prices at a higher level. Christmas, Thanksgiving and school
vacations are the busiest times.

Sometimes though, the reason for expensive flights doesn’t seem obvious at first. Imagine
you want to celebrate Navratri in Gujarat and your desired travel dates coincide with a
holiday there. Many Gujaratis living in the other states of India wish to see their families and
prices will rise because of higher demand.
Are there cheaper days to fly and book?
Yes, indeed. Even during the same week, prices can vary widely.

Generally, leaving on a Monday, Friday or Sunday will increase the risk of paying more for
your ticket as business travelers leave or return from their trip, and families leave or return
from their weekend trip.

Finding a cheap ticket is more likely on a Tuesday, Wednesday or Saturday. In addition, if


you're okay with less convenient departure and/or arrival times, the better your chances of
paying less, since most people prefer to leave at 9 am, instead of 5 am or return before 8
pm, not 11 pm.

Many of the cheaper booking classes have a 14-day advance purchase restriction, meaning
that you can only buy them 14 days or more before you depart. Other cheaper fare classes
also have a Saturday night rule, where you have to stay the Saturday night at your
destination for the lower fare. These usually rule out the business traveler as they want to get
home for the weekend or they fly last-minute.
Equilibrium/market -clearing price

Basic microeconomic principles show that in a free market the equilibrium price of a good or
service is the point where the supply is equal to the demand At this point, the price “equates
the quantity supplied to the quantity demanded” and market clearing takes place. Due to
market mechanisms, the price tends to change until the market is,

● To adjust demand and supply


● Example: Prices varying with time can be used to adjust a moving demand to limited
supply
Seat Capacity Allocation in Airline Alliance

In an airline alliance, it is generally the operating airlines and the marketing airlines who
separately sell the tickets. The operating airlines refer to the airline actually provides flights,
on the contrary, the marketing airlines only sell tickets but do not provide any flights. The
latter pays the former the transfer price for using of seats. Considering the independence and
maneuverability of system, currently, airline alliances adopt fixed seat capacity allocation,
which means operating airlines allocates a fixed number of seats to marketing airlines while
the marketing airlines pay transfer prices. The key to seat capacity allocation in airline
alliance is to properly determine the number of capacity allocated at different transfer prices
for two purposes: satisfying the marketing airline’s demand and increasing its own profit.

In reality, airlines in alliance sell it’s or others’ tickets, so marketing airlines and operating
airlines could exchange according to the leg who operate.

You might also like