Airline Revenue Management with callable products in a market of shrinking margin
Open Access
- Author:
- Hwang, Sunwoo
- Graduate Program:
- Industrial Engineering
- Degree:
- Master of Science
- Document Type:
- Master Thesis
- Date of Defense:
- None
- Committee Members:
- M Jeya Chandra, Thesis Advisor/Co-Advisor
M Jeya Chandra, Thesis Advisor/Co-Advisor - Keywords:
- financial engineering
callable products
revenue management - Abstract:
- Since the Airline Deregulation Act was passed in 1978, revenue management (RM) system has been markedly developed, and widely utilized by airlines. They could improve their profit by maximizing revenue and minimizing cost based on the RM techniques. RM approaches were adopted even in other industries where their usefulness was well recognized. As a result, airline industry became more efficient, which caused diminished arbitrage opportunities in the market. Moreover, the advent of information era enabled customers to easily search and move to a lower-fare and higher-quality provider, using internet access. In such a tightening market situation, shrinking margin forces the management of airlines to take greater risk in order to increase their profits. Several researchers recently introduced the concept of callable product, called a promotional ticket in this thesis, that was risky but expected to increase profit. Called a promotional ticket in this thesis, The callable product enables an airline to make money by hedging potential spoilage and yield losses while satisfying customers’ time-varying demands. In this thesis, first the value of the risk premium is priced first, under assumption that the product can be called at any time until expiration, which was not addressed in previous works. Next, the expected profit increases through the promotional ticket sales is examined. In addition, the matter of risk premium pricing was facilitated by assuming that ticket price follows geometric Brownian motion. Also, customer’s demand is assumed to follow non-homogeneous Poisson process.