REVENUE MANAGEMENT AT HOYSALA AIRLINES-3

The year is 2010. These are indeed testing times for the Indian airline industry. It has
been deregulated. Carriers are free to fly any route, at any time, and charge any price! As
a result, a large number of small-to-medium regional airline carriers have mushroomed
all over the country. Hoysala Airlines is one such regional carrier, fighting to make its
presence felt in the south Karnataka, Tamil Nadu and Kerala sector. One key player at
Hoysala is Ms Yasmin Dastur, who heads the Revenue Management cell. Perhaps in
recognition of the vital role this cell plays for the future success of Hoysala, Yasmin was
recently promoted to VP (Analysis and Research). Yasmin and her team provide
important inputs to management on matters such as forecasting the demand for flights,
flight scheduling, assigning carriers to flights, assigning of crews to flights etc.
These days, the daily flight (#11) from Bangalore to Thiruvanandapuram is occupying
Yasmins mind. Hoysala has decided to introduce and implement a 2-tier pricing scheme
for this flight. This scheme is going to be the first of its kind in India. It is based on the
recognition that there are essentially two distinct classes of passengers on this flight: the
business traveler and the vacation traveler. Historically, the airline industry in India has
catered primarily to the business traveler. This was particularly true when the industry
was regulated. The typical business traveler constituted either mid to high-level business
executives, or beaurocrats for whom price is not an issue (the bill was footed by someone
else!). On the other hand, the typical airline price was beyond reach for a vast majority of
vacation travelers, who would have to foot the bill from their own pocket.
Observations over the past two years indicate that flight # 11 has been going about half
empty on average. Hoysala has been using a Boeing 737 aircraft with a capacity of 80
seats for this flight. This amounts to an unused inventory of about 40 seats. Given that the
price per ticket is Rs. 4000.00, the loss in revenue is substantial. The importance of
Thiruvanandapuram as an important tourist destination is now well understood by the
decision makers at Hoysala. The famed Kovalam beach is a mere 16 kilometers from
Thiruvanandapuram. The Shangumukham beach is even closer. About 40 kilometers
away at Varkala is a Nature care Center, which is drawing tourists from all over the
world. It is clear then that much of the empty seats on flight # 11 can be filled by also
pursuing the other market segment: the vacation traveler. Hoysalas strategy for capturing
both markets is by creating two different fare products, one for the vacation traveler, and
the other for the business traveler. They are:
Discounted Fare (Q-Class): These tickets are priced at Rs. 1800. They must be
purchased at least 14 days in advance of the flight date. They are non-refundable and
non-changeable.

Unrestricted Fare (Y-Class): These tickets are priced at Rs. 4000. These tickets have no
restriction on them. They can be purchased any time up until flight departure. There is no
This is a suitable modification of the case Revenue Management at Atlantic Air that appeared in Data,
Models, and Decision: The Fundamentals of Management Science, Bertsimas and Freund (pp. 503-507).

cancellation charge, no charge for change in schedule. All cancellations, or change in

itinerary can be accomplished by simply calling a Hoysala Airlines 24-hour call center.
Yasmin and her group have done extensive work in estimating the daily demand for the
two products. Yasmin believes that the daily demand for both classes follows a normal
distribution whose parameters are specified in the table below.

DEMAND
Mean
Standard Deviation

Q-Class
Q = 45.0
Q = 9.5

Y-Class
Y = 40.0
Y = 7.0

The problem that is occupying Yasmins mind relates to the timing of the purchase of
tickets for both classes. All Q-class passengers have to purchase their tickets fourteen
days prior to the date of departure, while typically Y-class passengers will purchase their
tickets just a few days prior to the departure date. Supposing that for some flight, all
eighty seats are taken up by the Q-class passengers. As a result, many Y-class passengers
may have to be turned away. Clearly, this is an undesirable situation for Hoysala since Yclass passengers fetch more revenue than Q-class passengers. One solution is to
protect, or set aside a certain number of seats for the Y-class passengers. This may be
referred to as protection level. Thus the number of seats made available to Q-class
passengers, called booking limit, is not eighty (the capacity of the aircraft), but eighty
minus the protection level. Thus, if the protection level is set to twenty, then the booking
limit for Q-class passengers will be sixty. Of course, the booking limit for Y-class
passengers is eighty. What then is the most appropriate protection level? If it is too high,
then there is a danger that many seats may go empty due to insufficient number of Y-class
passengers. If it is too low, then revenue may be lost due to seats sold to Q-class
passengers instead of Y-class passengers. What revenue can Hoysala expect on average
from each flight when the 2-tier pricing scheme is implemented?
Yasmin is already thinking ahead. Is there a better combination of prices with which to
implement the 2-tier pricing scheme? In anticipation, Yasmins research team has
developed a model that relates average demand to the price charges for each class of
passengers. They are: 1) Y = 60 0.005*PY and 2) Q = 63 0.01*PQ. The first model is
valid over a price range, [3600, 4400], while the second model is valid over a price range,
[1500, 2000]. It is assumed that the volatility of the demand remains the same for all
prices within the price range.
Can you help Yasmin resolve her problem?

Another issue has been nagging Yasmin, and that is companies negotiating group
discounts on fares. For instance, Bannerghatta Consulting Group (BCG) has been
planning a strategy retreat for their members at Kovalam beach. They then approached
Hoysala for group discounts on twenty tickets. What must be the minimum economically
rational fare that Hoysala is willing to charge BCG under the new scenario? To be more
specific, suppose that BCG approaches Hoysala fourteen days prior to its departure date
to buy twenty tickets, what is the minimum price that Hoysala should be willing to
charge? If however, BCG approaches Hoysala within the fourteen-day interval, what is
the minimum that Hoysala must charge? Within the fourteen-day interval, will the
minimum price change depending on the number of Q-class tickets sold? If so, what will
they be for various levels? In short, Yasmin has to determine an appropriate group
discount pricing policy for Hoysala. These are the questions occupying Yasmin.
NOTE TO STUDENTS:
In your analysis, you may assume that the demands of Q-class and Y-class passengers are
unrelated (statistically independent).
If you are working on the spreadsheet and find working with a discrete distribution more
convenient, you can discretize the normal distribution in the following way. For instance,
the probability of Q-class demand being 30 is equal to Prob [(29.5-45)/9.5<Z
score<(30.5-45)/9.5].
You may assume, for the sake of simplicity, that all the Y-class demand occurs just before
boarding the flight. This is reasonable, since all Y-class passengers can change their
itinerary and cancel their flight at any time before the scheduled departure. They can also
pay just before boarding the flight.
You can also assume, for the sake of simplicity, that there is no overbooking involved in
the case of Y-class passengers. That is, once all eighty seats are taken up before flight
departure, no more Y-class passengers are considered. However, in reality, overbooking
very much applies in the case of Y-class passengers, since they are free to cancel their
reservations any time.