Advances in revenue management: the last frontier
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Advances in revenue management: the last frontier B. Vinod1 Received: 20 April 2020 / Accepted: 20 August 2020 © Springer Nature Limited 2020
Abstract After deregulation of the airline industry, revenue management has evolved from flight leg and flight segment-based inventory controls to origin and destination inventory controls. Advances in revenue management have always focused on more granular controls to maximize revenues. Revenue management of individual seats is the most granular level of inventory control by customer segment or individual customer. This paper discusses the evolution of revenue management leading up to the inventory control of individual seats. Keywords Seats · Seat types · Revenue management · Seat maps · Seat map cache
Historical perspective The origins of yield management (or “revenue management” as it is called today) can be traced to Littlewood (1972) from the British Overseas Airways Corporation (BOAC) who proposed that airlines maximize revenues instead of passenger occupancy on a flight for the perishable seat inventory. Known as Littlewood’s rule for two booking classes, this can be extended to multiple classes. The dismantling of government control with deregulation of the US airline industry in 1978 resulted in an exponential increase in fare filings and new markets that were served by airlines. In the fiercely competitive environment after deregulation, several airlines like Braniff Airlines (1982), PEOPLExpress (1986), Eastern Airlines (1991), and Midway Airlines (1991) ceased to operate. There was also a wave of airline consolidations after deregulation. The first yield management system was created in 1985 by American Airlines under the leadership of CEO Robert L Crandall to counter the competitive threat from PEOPLExpress. An Operations Research team under Tom Cook, President of American Airlines Decision Technologies, developed the system which was deployed in 1986 (Crandall 1995; Smith et al. 1992). The inventory controls for this system was based on leg/segment controls—leg class * B. Vinod [email protected] 1
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nested inventory controls with segment close indicators and segment limit sales by booking class. Yield management was renamed revenue management in the 1990s since revenue and not yield is maximized. Revenue management is based on the fundamental premise that for the management of perishable inventory all customers are not created equal. As a result, airline customers are conditioned to paying different amounts for the same product depending on when they book and the details of the itinerary. Leg/segment revenue management was followed by Origin and Destination inventory controls for network carriers to control the flow of connecting traffic through their hub airports. The first O&D yield management system based on virtual nesting controls was deployed in 1987 for American Airlines (Smith 1986; Smith et al. 1992; Vinod 1989). While a few airlines deployed virtual nesting in the 1990
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