These forecasts, together with estimates of the revenue
value of each booking class, are then fed into an
optimization model that calculates the recommended
booking limits for the flight departure in question.
At the same time, the demand forecasts are fed into
an overbooking model, which also makes use of historical
information about passenger no-show rates to
calculate an optimal overbooking level for the future
flight departure. Both the booking class limits and
overbooking levels calculated by the mathematical
models are then presented as recommendations to the
RM analyst.
The demand forecasts and booking limits are
reviewed by the RM systems at regular intervals
during the flight booking process, as often as daily
in some cases. Should unexpected booking activity
occur, the system reforecasts demand and reoptimizes
its booking limit recommendations. A substantial proportion
of the revenue gain attributable to fare mix
optimization comes from this dynamic revision of
booking limits.
Most large and medium-sized airlines throughout
the world have implemented third-generation RM
systems, and the benefits of such systems have been
well documented. Effective use of techniques for overbooking
and fare class mix alone have been estimated
to generate revenue increases of as much as 4%–6%
compared to situations in which no seat inventory
control tools were applied (Belobaba 1992b, Smith
et al. 1992).
3.2. Overbooking Models
Airlines have been accepting reservations in excess
of aircraft capacity for more than two decades, in an
effort to reduce the revenue losses associated with noshows.
With the development of RM systems, overbooking
was incorporated into the seat inventory
control functions of these systems. The objective of
the flight overbooking component of revenue management
is to determine the maximum number of
bookings to accept for any given future flight departure,
trading off the risks and costs of denied boardings
against the potential revenue loss from unsold or
spoiled seats.
Operations research work on the airline overbooking
problem can be traced to the 1960s, well before