TERM PAPER REPORT

DATA WAREHOUSING & DATA

MINING
Research of airlines revenue Management Decision Support
System based on Data Warehouse

Submitted to : Submitted by :

Ms. Karanvir Kaur Navjotpal Kaur

RG1007 B33
 Research of airlines revenue Management
Decision Support System based on Data
Warehouse

NavjotPal Kaur
RG1007B33
M.TECH(CSE),LPU

Abstract— This paper describes the role

of revenue management in airlines
decision support system based on data • That the resources sold are perishable. This means that
warehouse. The airline industry is one of the there is a time limit to selling the resources, after which
most strategic and competitive industries in they cease to be of value.
the world. RM techniques have been • That different customers are willing to pay a different
successfully utilized in Airline Industries. In price for using the same amount of resources
this paper we have discussed Differential
Pricing, Market Segmentation, Demand
Forecasting & many more important aspects
critical to decision making.

I. INTRODUCTION
The airlines process about 125 million
transportation documents on an annual basis.
With the amount of data created by all these
ticket documents, Airlines need an efficient
data warehouse that would help ensure proper
amounts of earned revenue on ticket sales.
Airlines use special software to monitor how
seats are being reserved and react accordingly, Figure 1
for example by offering discounts when it
appears that seats will remain unsold.
Revenue Management is of especially high relevance in
II. REVENUE MANAGEMENT cases where the constant costs are relatively high
compared to the variable costs (as is the case with
Revenue Management is a technique to airlines). The less variable costs there are, the more the
optimize the revenue earned from a fixed, additional revenue earned will contribute to the overall
perishable resource. The challenge is to sell profit.
the right resources to the right customer at the
right time. RM works on the fundamental concepts of market
Revenue Management implements the basic segmentation and price discrimination. Purchase
principles of supply and demand economics in regulations and refund requirements help to segment the
a tactical way to generate incremental market.
revenues. There are three essential conditions For example, higher fares may be fully or partially
for revenue management to be applicable: refundable and purchasable at all times whereas lower
fares are non-refundable and must be purchased a
number of days in advance.
• That there is a fixed amount of resources
available for sale.
Price-sensitive customers are willing to put up
with the lower flexibility & have lesser
assessment for service while those who
have higher assessment for the service are
willing to pay more.
In airlines, business travellers constitute price- There is also the distinct possibility that
insensitive market segment and leisure
travellers form the price-sensitive market
segment.
RM is Essential to Airline Profitability
 Annual benefit of Yield
Management to a major airlines is
3% – 6% of total revenue
 A major airlines’ revenue benefits
from yield management exceed
$500,000,000 per year
 Applying this rate to the industry
($300 billion/year) yields potential
benefits of $15 billion per year
 The possibilities for even the most
sophisticated carriers go well
beyond what is achieved today
Yield management is driven to a large
extent by the tried and true business
practice of charging as high of a price as
the market will bear; therefore, when
planes are full of paying passengers, and
these passengers are paying the highest
possible price, the yield of the planes is
maximized-that asset is generating a
peak amount of return for the investment
of flying the plane from one destination
to another.
Conversely, if demand for air travel is
low at a given point, it is feasible that
the customer will pay a lower fare
because the demand for the airline ticket
simply does not exist at that time. To
overcome this shortage of passengers,
airlines may even lower airfares at the
last minute to realize last minute fares,
thereby making a last-ditch attempt to
maximize the yield that the aircraft will
deliver for the assets that have to be
devoted regardless of a plane's flight
with one paying customer or one
hundred.
While this could in fact be a useful way
to recoup an investment in the absence
of any other viable alternative, it can
also have its disadvantages. At a
discounted fare, there is the possibility
that the customer will cancel other
higher priced flights on the same airline
to pay less which in the long run harms
the airline much more than the problem
that was attempting to be corrected.
if the airline develops a reputation for
discounting fares regularly, those who
have the ability to delay air travel or
schedule it flexibly may decline to pay
higher fares in the future, which sets up
a system of loss for the foreseeable
future.
One of the most complicated parts of
Revenue Management is of course the
actual choice of where to engage in
operations; for the airlines, this means
choosing where flights will take off
from and travel to, how often these
flights will take place, and if flights will
be added or removed from the
schedules.
Also thrown into the mix is the
allocation of maintenance, human
resources, etc.
Simple math shows that these factors
create literally thousands of alternative
courses of action, making it necessary
for those in charge of Revenue
Management to make these key
decisions with the assistance of cutting
edge technology, such as software
applications which analyze all of the
alternatives and assigns resources for the
best management of revenue, taking out
of the decision model the human
tendency to "play it safe" or
procrastinate. Proper decisions need to
be made rapidly, and technology makes
this possible
Two classic examples of the best and
worst case scenarios in Aviation Yield
Management can be seen in British
Airways and American Value Jet
respectively. British Airways, through
its merger with US Airways, has formed
a powerful airline that is now able to
provide reliable, convenient travel
between the United Kingdom and
United States and vice versa. Because
the airline offers a highly desirable
 service that is in demand by the
consumer, high prices can be charged
with few exceptions because the
customer still values the service at the
higher price. Therefore, British Airways
has been able to maximize yield and
retain market share.
On the other hand, the now bankrupt
Value Jet tried to maximize yield
through low fares, which did sell seats
on their flights but resulted in very little
revenue for the airline. Because of a
cash flow problem, behind the scenes,
Value Jet neglected technological
upgrades and necessary maintenance to
aircraft in their fleet, resulting in a tragic
crash several years ago which killed
dozens of innocent people and ended the
Value Jet company and concept. The
point is that Yield Management is
almost a science, whereby it must be
balanced without neglecting key
elements of operations which could save
money but cost lives in the extreme
cases.
The best example of successful Revenue
Management perhaps comes from the
pioneer of this practice in the airline
industry, American Airlines.
In the early 1960s, American found
itself spinning out of control on the
fiscal end; empty planes were flying to
destinations where no one was waiting
to board them, ticket pricing often was
too low to cover costs, passengers could
not get flights to where they wanted to
go and the pilots themselves were often
paid to sit idle while flights did not take
off as they should. In short, resources
were being mismanaged, resulting in
mismanagement of revenue.
To remedy this mismanagement,
American introduced the Sabre
computer system, which at that time was
unheard of; this system effectively
planned the use of all resources for
effective management of revenue.
AIRLINE REVENUE MANAGEMENT
How You Will Benefit
 Understand the characteristics of
airline demand and the strategies
applied to forecast demand
 Apply practices used in pricing
strategies
 Learn how large revenue is gained
through correct application of
optimal seat allocation
 Make correct decisions in order to
optimize revenue on a given flight
 Learn how making correct
scheduling and capacity adjustments
can determine profitability
 Apply effective principals of
performance monitoring to achieve
revenue objectives
 Find out the challenges posed and
opportunities generated by
eCommerce
 Learn how to build a successful
airline revenue management
organization
 Understand why low-cost airlines
require a revenue management
system
Revenue Management, in its best use, also
has helped the aviation industry
tremendously in the wasteful and costly
practice of the overbooking of flights. In the
past, to realize the most revenue, airlines
commonly sold more seats than were
available on a flight, based on the
assumption that some people would cancel
their reservations, choose a different flight,
etc.
However, this did not happen as often as
was desirable, and in turn, airlines wasted
huge financial resources in compensating
passengers who were unable to take the
desired flights. All of this also took the time
of paid airline staff, translating into even
more expense. When technology, joined
with Revenue Management, made this
practice less frequent, the financial benefits
were quite substantial, advancing the cause
of revenue maximization and moving the
business end forward.
III. DIFFERENTIAL PRICING &
MARKET SEGMENTATION

Price discrimination or differential pricing
means charging different prices to different
consumers, where the price difference cannot be
fully explained by differences in cost.
Differential pricing entails the development of a
multi tiered fare structure with different
restrictions and requirements placed on each fare
product.
The goal of differential pricing is to get
passengers to buy tickets that are close to their
maximum willingness to pay for transport. RM
is the practice of controlling seat inventory to
protect seats for last-minute passengers who are
willing to pay more for travel by limiting the
amount of seats that can be booked in low fare
classes.
Airlines price discriminate in two ways:
first, by offering consumers a range of
packages, or combinations of fares and
restrictions attached to the tickets; and second,
by restricting the number of discounted seats
on each flight.
Characteristics Business Leisure travel
travel
Advance Booking Booked close to Booked in
to departure Advance
Stay at Destination Rarely includes Usually
a includes a
weekend weekend
The first type of price discrimination is known
as second-degree or self-selection price
discrimination. Consumers choose their
preferred version of a product based on their
willingness to pay for specific attributes of the
good (e.g., time, convenience, flexibility).
The second type is a case where carriers use a
rationing device and limit the supply of the
cheaper good.
A RM system includes a detailed forecaster to
project future bookings for all flights in all
markets using a historical database (data
warehouse) and an optimizer that sets
inventory control limits on the number of seats
to make available in each fare class or in a
market. (See Figure 1)
Demand may vary by time of day, day of
week or season of year. These demand
patterns can be used to predict the potential
future demand in each market segment.
In airline, car rental and hotel industry, little
information is available for millions of
customers. Hence they use statistical
techniques for demand forecasting.
A fare structure with different fare levels
attempts to segment passengers into distinct
groups by adding restrictions and
requirements to the low-fare ticket classes.
This allows price-sensitive but schedule
flexible passengers, to book lower-priced
tickets. At the same time, less flexible
passengers, typically business passengers,
usually have only higher-fare options
because the restrictions and requirements
placed on low-fare tickets are unattractive to
this segment of passengers
IV. FORECASTING DEMAND
Once the market has been segmented and the
initial rate structure has been put into place,
the other elements of revenue management
come into play. The first of these is the
Demand Forecasting process.
In most service industries, demand for the
product exhibits one or more regular patterns
– either cyclic in nature (such as time -of-
day, day-of-week or season-of-year), or
trends (growth in demand due to growth in
the economy at large), which can be
projected forward in order to estimate future
demand in each market segment.
The forecasts that can be produced by
analyzing these patterns are seldom precise.
It is this uncertainty about the future demand
for the service that gives revenue
management its revenue advantage and
makes it a challenge.
It is the management of this uncertainty that
is the essence of revenue management. The
uncertainty is managed by:
• Minimizing the uncertainty by producing
the best possible forecast of demand and its
degree of unpredictable variation.
 While simulated passengers are using
• Acknowledging the uncertainty and their choice set to inquire about specific
reflecting it in the decision analysis process. itineraries, the revenue management
When we make decisions about pricing our model, which may use a different
service as if we could know with certainty algorithm for each airline, determines
that we will be offered a specific level of
whether or not to accept the itinerary and
demand when, in fact, there is only some
probability that it may materialize, we make book it or not. The decision to accept or
many bad decisions which, over time, are reject the itinerary request is based on
sure to cost us money. the booking limits that are formulated
and set by the revenue management
algorithm.
V. HOW IT ALL WORKS
There are essentially four components
within the RM system architecture: the
passenger choice model, revenue
management, forecaster and historical
booking database (the data warehouse).

The process begins at the passenger

choice model. (See Figure 2) Passengers
are generated randomly based on input
parameters. These generated passengers
can be of two types: business or leisure.
The system generates path preferences
Figure 2
based on input parameters and passenger
type.
The forecaster and historical database
are used so that booking limits are
The passenger choice model uses input
calculated by incorporating some
parameters, such as disutilities and
forecasting method, which is influenced
willingness-to-pay to formulate the
by historical bookings.
choice set of a passenger.
The first step is to generate disutility
If the RM system deems the itinerary
costs, favourite airline choice and the
unavailable, then the passenger may try
decision window of the specific
his/her next choice, but if the RM system
passenger.
accepts the request then it is booked and
Then a maximum WTP (willingness-to-
the availability is adjusted to reflect the
pay) is generated.
booking.
This process is repeated for every
simulated passenger. After a certain
Next, a total perceived cost is calculated
interval of time, known as ‘timeframe’,
for each option accounting for the
the current bookings in the revenue
disutility costs and fares.
management model are reported to the
Finally, the model attempts to assign
forecaster. The forecaster then adds that
passengers to available seats within the
data to the historical data base and a new
choice set of the passenger, starting with
forecast is generated from the updated
the most preferred one.
historical data. The new forecast is used
to reset booking limits and bid prices.
The revenue management model is used
next.
The above process, called a ‘sample’ is
repeated many times to generate a large
enough sample to obtain statistical
significance. The standard number of
samples in a ‘trial’ is 600. Furthermore,
one ‘run’ consists of five trials. Among
the 600 samples per trial, the first 200
are known as ‘burns’. These samples are
only used to develop the historical
database to develop a ‘forecast’.
Therefore, a single ‘run’ normally
consists of 2000 samples, but this is a
variable parameter.

VI. REFERENCES

 http://www.decisioncraft.com/dm
direct/revenue_management.htm

 http://www.sybase.in/detail?
id=210272

 http://www.adhp.org/pdf/1-
theBasicsofRM.pdf

 IDEAS(integrated decisions and

systems), Inc., The basics of RM,
2005.

 Kamath, Vani, Tourism

infrastructure- technology and
operations, IIMK, 2008.