An Option-Based Method for Revenue Management in the Airline Industry with Two Classes

Open Access
Liu, Chang
Graduate Program:
Industrial Engineering
Master of Science
Document Type:
Master Thesis
Date of Defense:
Committee Members:
  • M Jeya Chandra, Thesis Advisor
  • Airline Industry
  • Revenue Management
  • Financial Option Theory
ABSTRACT In the context of airline industry, the revenue management is the practice of managing the ticket sales in an airline booking process with an important target of maximizing the sales revenues. The topic has been studied since the early 1970s. In recent years, an application model, which uses the financial option theory in revenue management for single-fare single-leg problem in airline industry, has been designed. The purpose of this thesis is to advance the model to make it more reasonable to apply. An airline may be considered as the holder of both call option tickets for customers and put option tickets for travel agents. Based on different demand situations, the airline could offer two levels of tickets to its customers at any period for a single leg. Also, at the last minute before departure, the overbooked passengers may choose to travel in a different class or not to travel, rather than waiting for the next flight. The potential revenue loss caused by customer dissatisfaction, which results from denied boarding, is also taken into consideration. These factors determine the optimal booking limits for call and put option tickets, and the optimal prices for the two options. A general description of the whole booking process is presented. At last, a numerical example is given to illustrate the application of the model.