what has come to be known as “virtual nesting”
(Smith et al. 1992), an assignment process that maps
each itinerary/fare type to a hidden or “virtual” value
class within the airline’s own reservations system. For
an itinerary/fare assigned to a given virtual class,
the seat availability on a given flight leg is established
by the booking limit for that virtual class. Initial
implementations of virtual nesting were based on
total itinerary fare values, giving preference to longerhaul
connecting passengers with higher total fares.
The shortcoming of this “greedy” approach was that
it did not address the need under certain circumstances
to give preference to two “local” passengers
instead of taking the connecting passenger.
OR models have been instrumental in the subsequent
development of O-D control strategies that
allowed airlines to manage seat inventories on
the basis of the network revenue value of each
itinerary/fare combination. Network revenue value can
be defined as the total itinerary fare (ticket value)
minus the revenue displacement that might occur on
connecting flight legs if the passenger’s request for
a multiple-leg itinerary is accepted. For example, the
network revenue value of an $800 total fare on the
first leg of a connecting itinerary must be reduced by
$300 if acceptance of this passenger would result in
displacement of $300 in total network revenue on the
second flight leg. The displacement cost associated
with the last (lowest valued) available seat on a given
flight leg is its marginal value to the total network
revenue—the amount by which the total network revenue
would decrease if we were to “remove” (or sell)
one seat on the flight leg. If the flight leg consistently
has empty seats, the marginal network value of its
last seat would be zero. In the more realistic situation
where the flight leg has a significant probability
of being full and it carries both local and connecting
passengers, determining the impact on total network
revenues of removing a seat can require substantially
more complicated analysis, including network optimization
models.
Various network optimization and heuristic algorithms
have been applied to the problem of determining
the network revenue value contribution of
each O-D itinerary and fare product (or ODIF). As
described in Belobaba (1998), several large airlines
make use of leg-based EMSR values to approximate
the network revenue value associated with a given
connecting itinerary/fare combination. Because these
approaches do not make use of any formal network
optimization models, they are referred to as “legbased
heuristic” models for estimating network revenue
displacement.
The majority of published works devoted to the
O-D seat inventory control problem have proposed
mathematical programming approaches to determine
optimal seat allocations for every ODIF over a network
of connecting flight legs (see, for example,
Glover et al. 1982, Dror et al. 1988, and Curry 1990).
Williamson’s (1992) doctoral thesis provides a comprehensive
review of the literature relevant to the application
of mathematical programming and network flow
models to the O-D seat inventory control problem.
More recently, there have been new works proposing
more sophisticated network models. For example,
Bratu (1998) developed a “probabilistic network
convergence” algorithm for estimating the marginal
network value of the last available seat on each leg
in an airline network. Talluri and van Ryzin (1999a)
propose a randomized linear programming method,
while stochastic dynamic programming is also being
pursued as an alternative algorithm for determining
the marginal network value of a range of remaining
seats on each flight leg to account for changes to the
marginal value as bookings are accepted.
Given an estimate of down-line revenue displacement
it is possible to map ODIFs to virtual classes
based on their estimated network revenue value. Displacement
adjusted virtual nesting (DAVN) increases
availability to connecting passengers, while adjustment
for down-line displacement of revenues ensures
that two local passengers (with a higher total revenue)
will receive preference when two connecting flights
are expected to be heavily booked.
The estimated marginal network revenue of the
lowest-valued available seat on a flight leg can also
be used in a much simpler inventory control mechanism
based on bid price controls. At the time of an
ODIF request for seat availability, the ODIF fare is
evaluated against the sum of the leg bid prices over
the itinerary being requested. As was the case for estimates
of revenue displacement associated with connecting
passengers, leg bid prices can similarly be