Zero displacement cost model: a simplified RM model for post-COVID-19 O&D management
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Zero displacement cost model: a simplified RM model for post‑COVID‑19 O&D management Landie Qiu1 Received: 6 March 2020 / Accepted: 11 August 2020 © Springer Nature Limited 2020
Abstract In the airline industry, the aim of O&D RM is to optimize network revenue by increasing seat availability for high-revenue connecting passengers while preventing connecting passengers from displacing high-yield local passengers to reduce displacement costs. Traditional O&D models rely heavily on complex historical data analysis. The outbreak of COVID-19 has led to an unprecedented disruption of the global airline industry. It has reset historical data, thereby reducing the reliability of the traditional forecasting and optimization results. This paper proposes Zero Displacement Cost (0DC) model as a simplified and flexible model for airlines to manage O&D in the post-COVID-19 world. Keywords Revenue management · O&D · Displacement cost · COVID-19 · Forecasting · Network optimization
Introduction The development of Revenue Management (RM) in the airline industry started with overbooking in the 1960s and simple two-fare offerings in the 1970s. US airline deregulation in the 1970s and the resulting plethora of airfares in the 1980s led to further refinements in RM practices. These refinements included introducing multiple forecasting and optimization methods. By the 1990s, a few airlines had mastered leg-based RM. While many passengers’ itineraries involve one single flight leg (point-to-point), a significant portion of passengers’ true Origin and Destination (O&D) involve more than one flight leg. This can be particularly relevant for airlines that arrange their flight schedules using the hub-and-spoke concept and offer many connecting O&Ds. From 1990s, airlines have realized that they should aim to optimize revenue over the whole network, rather than on individual legs (Bertsimas et al. 2005), so O&D RM was born. It has further accelerated the development of hub-and-spoke networks with more connecting flights and international routes operated.
However, the outbreak of COVID-19 (Coronavirus Disease 2019) has brought the airline industry to a standstill in 2020. Governments have issued travel bans, demands have plummeted, and airlines have massively reduced capacity, especially for international routes. Traditional O&D RM models rely on stable historical data to generate robust demand forecasting, but COVID-19 outbreak has reset historical data by making them irrelevant or unusable, RM managers have to set fares from scratch for the postCOVID-19 recovery. Additionally, because of the complicity of traditional models, it’s difficult to calibrate them to respond to market uncertainties, let alone the extreme circumstances of COVID-19. The aim of this paper is to propose a simplified and flexible O&D RM model to quickly cope with COVID-19 disruption. The remainder of this paper is structured as follows: the second section first reviews the traditional O&D optimization models and their limitations. The next section p
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