revenue management for airline alliances...revenue management for alliances alliances formed with a...
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Revenue Management for Airline gAlliances
H. JainMIT, Cambridge, MANovember 4 2010November 4, 2010
Global Alliance Market Shares
Available Seat Kilometres 2010 Revenue Pass. Kilometres 2010
Star Alliance26.2%Others
41.9%
Star Alliance26.4%Others
41.1%
SkyTeam16.1%
oneworld15 8%
SkyTeam16.6%
oneworld15.8%
S Sk T ld
ASK(Bn)
15.9%
S Sk T ld
RPK(Bn)
Star SkyTeam oneworld
1569.1 963.9 944.6
Star SkyTeam oneworld
1205.1 755.1 725.1
Source: Airline Consolidation, Dr. Olaf Backofen, Deutsche Lufthansa AG, MIT, June 12, 2010
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Revenue Management for Alliances
Alliances formed with a goal of increasing revenues for the member airlines
Alli t d th i t k b Alliance partners expand their network coverage by use of codeshare on each other’s flights
Sub-optimal benefits or potentially negative effects can arise from:
Lack of joint network optimization solutionLack of joint network optimization solutionPartners using arbitrary codeshare valuation in their Revenue Management (RM) systemsDifferent RM capabilities of each partner technical Different RM capabilities of each partner, technical distribution system constraints
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Codeshare Example
Operated Flights: UA101 LH202Operated Flights: UA101 LH202
LAX BOS FRA
Codeshare: LH*2101 UA*1202
Seats must be made available by RM systems of both operating carriers to accept the codeshare b ki LAX FRAbooking: LAX-FRA
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PODS ALLIANCE NETWORK: Cities & Hubs
BZNGEG
YVR
SEA
PDXMSP
BZNPDX
PHL
LGA
CLE
BOS
GRR
ANC
NRT
AMS
LHR
ORD
SFO
SLC
LAS
DEN STL
CLEPIT
MCI
CVGCMH
BWIDCAHNL
AMS
CDG
FRA
DFW
SAN
LAXSNA
LAS
PHX
MEMATL
TPAMSY
MIA
IAHLIM
BUE
MEX
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Code Share Paths via ORD Hub
BZNGEG
YVR
SEA
PDXMSP
BZNPDX
PHL
LGA
BOS
GRR
CLE
ANC
NRT
AMS
LHR
SFO
SLC
DEN STL
BWIDCA
ORD PIT
CVGCMH
CLE
LAS
MCI
HNL
CDG
FRA
DFW
SAN
LAXSNA
ATLMEM
LAS
PHX
AUS
TPAMSY
MIA
IAHLIM
BUE
MEX
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Code Share Paths via DFW Hub
BZNGEG
YVR
SEA
PDXMSP
BZNPDX
PHL
LGA
CLE
BOS
GRR
ANC
NRTAMS
LHR
ORD
SFO
SLC
LAS
DEN STL
CLEPIT
MCI
CVGCMH
BWIDCAHNL
CDG
FRA
DFW
SAN
LAXSNA
LAS
PHX
MEMATL
TPAMSY
MIA
IAHLIM
BUE
MEX
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Examples of Double Connect CS Paths
BZNGEG
YVR
SEA
PDXMSP
BZNPDX
PHL
LGA
CLE
BOS
GRR
ANC
NRTAMS
LHR
ORD
SFO
SLC
LAS
DEN STL
CLEPIT
MCI
CVGCMH
BWIDCAHNL
CDG
FRA
DFW
SAN
LAXSNA
LAS
PHX
MEMATL
TPAMSY
MIA
IAHLIM
BUE
MEX
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1. Different Levels of Information
Itinerary information (AVS and Cascading)BASELINE: Under standard AVS practices, operating airline does not know complete itinerary airline does not know complete itinerary “Cascading” gives both partners complete itinerary information for making availability decisions
Each alliance partner performs optimization for own network separately:p y
Separate network optimization assuming local fare valuation of code-share connecting passengers
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Benefits of Network RM and Full InformationRevenues Compared to Baseline: Leg RM
1.20%
1.40%
0.80%
1.00%
CASCADING
0 20%
0.40%
0.60% AVS
0.00%
0.20%
PARTNER 1 PARTNER 2 ALLIANCE COMPETITOR
The control is sub-optimal for the alliance because of the arbitrary local fare valuation on codeshare pathsCascading leads to slightly higher revenues than AVS Cascading leads to slightly higher revenues than AVS (red stacks)
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2. Codeshare Valuation
Valuation of CS bookings in RM systems affects:Own network because of potential displacement of own local and connecting trafficown local and connecting trafficPartner’s network due to interaction with their RM system and availability calculations for CS bookings
Two codeshare (CS) valuation schemes are compared:compared:
Local Fare Valuation: CS paths are valued at the local fares by each partner regardless of the total fareY Prorate Valuation: Total fare is divided exactly into Y-Prorate Valuation: Total fare is divided exactly into two parts, in the ratio of the Y-Prorates (highest fares)
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Valuation Schemes
LAX BOS FRA
Booking (O‐D) Marketing Airline OD Fare
LAX‐BOS UA $ 200
BOS FRA LH $ 500BOS‐FRA LH $ 500
LAX‐FRA Codeshare(UA/ LH )
$ 600
Valuation of Valuation of Airline LAX‐FRA
UA $ 200
LH $ 500
Airline LAX‐FRA
UA $ 150
LH $ 450LH $ 500
Total $ 700
LH $ 450
Total $ 600
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Local and Y-Prorate ValuationRevenues Compared to Baseline: Leg RM
1.00%
1.50%
0 00%
0.50%
‐0.50%
0.00%
PARTNER 1 PARTNER 2 ALLIANCE
LOCAL FARE INPUTS
‐1.50%
‐1.00%Y‐PRORATE INPUTS
Y-Prorate leads to slightly higher gains for the allianceThough the difference in gains in small, the revenuecomponents are quite different in the two schemescomponents are quite different in the two schemes
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Revenue ComponentsY-Prorate vs. Local Valuation
4000
6000
8000
)
Y‐Prorate Valuation compared to Local
‐2000
0
2000
LOC CNX CS LOC CNX CSte Change ($)
8000
‐6000
‐4000
2000
Absolut
‐10000
‐8000PARTNER 1 PARTNER 2
*Codeshare (CS) revenues are pre-resolution
Y-Prorate values the codeshare bookings at a lowervalue and hence take fewer codeshare bookings
Codeshare (CS) revenues are pre-resolution
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3. Bid Price Sharing
B ki R t
Bid price = marginal network revenue value of available seat on each leg
Bid Price Inventory Control
Bid PricesPartner 1:
Booking Request
Decision
Computation ControlAt the end of each time
frame
Separate Optimization
Partner 2:Booking Request
Bid Price Sharing
Bid Price Computation Bid Prices
Inventory Control
Decision
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Bid Price Sharing ResultsRevenues Compared to Baseline: Leg RM
1 00%
1.50% Incremental gain of 0.3% using Bid price sharing is equivalent to $ 200M for an alliance like United-Lufthansa
0.50%
1.00%
NO BPS
0.00%
LOCAL Y‐PRORATE LOCAL Y‐PRORATE LOCAL Y‐PRORATE
WITH BPS
‐0.50%PARTNER 1 ALLIANCEPARTNER 2
‐1.50%
‐1.00%Bid Price sharing yields higher gains for both Local and Y-Prorate Valuation
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Next Step: Dynamic Codeshare Valuation
Until now, only own airline bid prices are used for the network optimization by each partnerIncorporating estimates of the value of a partner’s seat Incorporating estimates of the value of a partner s seat into own optimization gets closer to the joint network revenue solution
Booking Request
Bid Price Comp.
Inventory Control
Bid Prices
Partner 1:Decision
At the end of each
Bid Price Comp.
Bid Prices
Separate Optimization
Booking Request
time frame
Use the Partner’s Bid Prices in valuation:
Next Time Frame
Total Fare - Partner’s Bid Price
Bid Price Comp. Bid Prices
Partner 2:
Inventory Control
oo g equest
DecisionBid Price Sharing
Bid Price Comp. Bid Prices
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Conclusions
Airline revenue gains can be affected by alliances:Valuation scheme of code share passengers affects seat availability decisions on both partner networks With separate and uncoordinated RM, one partner can benefit more than the other
Information sharing improves revenues: Cascading yields higher revenues than AVSBid i h i i ld b t ti ll hi h Bid price sharing yields substantially higher revenues, of the order of $ 100M (each) for big alliance carriers
Dynamic codeshare valuation using bid prices can Dynamic codeshare valuation using bid prices can lead to even greater revenues
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