calculated either with network optimization tools or
leg-based heuristics such as EMSR approaches. Talluri
and van Ryzin (1999b) have done much work on
network bid price control and identify the conditions
under which this approach provides revenue
optimality, while de Boer et al. (2002) compare the
performance of deterministic and stochastic network
formulations for O-D control.
Until recently, relatively few airlines had implemented
network optimization models for dynamic
calculation of displacement costs and/or bid prices
for O-D control. Because most reservations systems
and, in turn, third-generation RM systems were
developed on the basis of leg/fare class data, most
airlines did not have access to the detailed historical
ODIF booking data required by network optimization
models. Use of large-scale network optimization
models also raised technical and computational issues
related to the solution times and frequency of reoptimization.
However, with the development of airline
databases designed to capture detailed ODIF historical
data, along with advances in both solution algorithms
and computational speeds, network revenue
management has been implemented by over a dozen
airlines in different parts of the world.
The benefits of leg-based revenue management
and incremental benefit of O-D controls over legbased
fare class controls have been estimated by
several researchers through simulation. For example,
Williamson (1992) developed a network revenue management
simulation approach that allowed different
schemes for optimization and control of seat inventories
to be tested. An even more realistic approach
to simulating the impacts of different RM schemes in
a full-scale, competitive airline network environment
is that of the passenger origin-destination simulator
(PODS). Developed originally by researchers at Boeing
(Hopperstad 1997), PODShas been enhanced to
realistically simulate large networks in which competing
airlines generate RM forecasts and set seat inventory
controls based on “historical” (i.e., previously
simulated) data. At the same time, the simulated passengers
in PODSchoose among alternative airlines,
fares, restrictions, schedules, and seat inventory availability
as established by each airline’s own RM system.
PODShas been used to simulate the competitive
impacts of RM (Belobaba and Wilson 1997), as well as
the benefits of improved forecasting models and the
impacts of RM on airline alliances.
The simulations cited here along with others performed
by academics and airlines have provided consistent
estimates of the potential for revenue gains of
1%–2% from advanced network revenue management
methods, above and beyond the 4%–6% gains realized
from conventional leg-based fare class control.
The potential to realize even 1% in additional revenue
through network RM is substantial enough that many
of the world’s largest airlines have implemented or
are in the process of developing their O-D control
capabilities. For a large airline with annual revenues
of $5 to $10 billion or more, successful implementation
of a network RM system can lead to total revenue
increases of $50 to $100 million per year.
3.5. Future Challenges
Development of OR models for the “next generation”
of airline revenue management is currently an
extremely popular topic among academics and practitioners
alike. The most obvious next steps in the
further enhancement of airline revenue management
systems is to integrate the pricing and seat inventory
control decisions currently being made with different
decision support tools and, at many airlines, in different
parts of the organization. Clearly, the ability to
relax the traditional RM assumption that fare structures
are given and fixed has the potential to further
increase the revenue gains of RM. Joint pricing and
inventory optimization requires the incorporation of
passenger choice and demand elasticity models, and
promising OR work in this direction has been published
by Weatherford (1997), Gallego and van Ryzin
(1997), and Cote et al. (2003), among others. In a
recent Ph.D. dissertation de Boer (2003) examines this
problem in a network context and presents a variety
of other modeling advances and insights.
Looking ahead, it is apparent that information
about the utilization of seat inventories and the
response of passenger demand to different pricing
strategies can and should provide useful feedback
to fleet assignment and even scheduling of airline
flight departure times. The integration of airline pricing
and seat inventory decisions with those of the