Delayed Purchase Options in Single-Leg Revenue Management

Abstract

Many airline reservation systems offer the commitment option to their potential passengers. This option allows passengers to reserve a seat for a fixed duration before making a final purchase decision. In this study, we develop single-leg revenue management models that consider such contingent commitment decisions.We start with a dynamic programming model of this problem. This model is computationally intractable as it requires storing a multi-dimensional state space due to book-keeping of the committed seats. To alleviate this difficulty, we propose an alternate dynamic programming formulation that uses an approximate model of how the contingent commitments behave and we show how to extract a capacity allocation policy from the approximate dynamic programming formulation. In addition, we present a deterministic linear programming model that gives an upper bound on the optimal expected revenue from the intractable dynamic programming model. As the problem size becomes large in terms of flight capacity and the expected number of arrivals, we demonstrate an asymptotic lower bound for the deterministic linear programming model. Our extensive numerical study indicates that offering commitment options can noticeably increase the expected revenue even though offering a contingent commitment option may not always be in the best interest of the airline. Also, our results show that the proposed approximate dynamic programming model coordinates capacity allocation and commitment decisions quite well.

An Approximation Algorithm for Capacity Allocation Over a Single Flight Leg with Fare-Locking

“…So, the customers do not anticipate the behavior of the policy that is used to decide which fare classes to make available. This approach is precisely the same one adopted by Aydin et al (2016) and Chen and Chen (2016). In our model, we can interpret 1 − ρ as the fraction of customers with uncertain travel plans.…”

“…The models in Aydin et al (2016) and Chen and Chen (2016) precisely correspond to the models that we consider in this paper under independent demand and price dependent demand. Aydin et al (2016) demonstrate that it is not always beneficial for the airline to offer the option of locking a fare, but there are cases when the revenue improvements from offering the option can be substantial. Chen and Chen (2016) study how the option of locking an available fare affects the pricing decisions of the airline.…”

“…There are two studies of the revenue management problem over a single flight leg with an option to lock an available fare. Aydin et al (2016) consider the problem under independent demand, whereas Chen and Chen (2016) consider the problem under price dependent demand. The models in Aydin et al (2016) and Chen and Chen (2016) precisely correspond to the models that we consider in this paper under independent demand and price dependent demand.…”

“…Aydin et al (2016) consider the problem under independent demand, whereas Chen and Chen (2016) consider the problem under price dependent demand. The models in Aydin et al (2016) and Chen and Chen (2016) precisely correspond to the models that we consider in this paper under independent demand and price dependent demand. Aydin et al (2016) demonstrate that it is not always beneficial for the airline to offer the option of locking a fare, but there are cases when the revenue improvements from offering the option can be substantial.…”

Resilient revenue management: a literature survey of recent theoretical advances

“…Their research is extended by negotiated option prices in Graf and Kimms (2013). As yet another view of options in revenue management, Aydın et al (2016) highlight that most airline customers book a commitment option when booking a ticket, as they can still cancel the reservation before making a final purchase decision.…”