FINANCIAL OPTION METHOD FOR REVENUE MANAGEMENT IN THE AIRLINE INDUSTRY

Open Access
Author:
Zhang, Nan
Graduate Program:
Industrial Engineering
Degree:
Master of Science
Document Type:
Master Thesis
Date of Defense:
None
Committee Members:
  • M Jeya Chandra, Thesis Advisor
Keywords:
  • revenue management
  • financial option
  • airline industry
  • American option
Abstract:
The airline industry is an area where fierce competition exists. Maximizing revenue is an important target for the airlines. This is known as revenue management or yield management. A lot of research has been done in this area to help the airlines achieve their goals. Recently, some of the researchers switched their focus from the traditional and most mainstream methods, such as stochastic and dynamic models, to financial option methods. From the works they have done, it is shown that the financial option concept, which requires easier analysis, could provide more revenue in an easier calculation method. The purpose of this thesis is to advance the application of the financial option theory in revenue management for the airline industries. The whole booking process is divided into several exclusive stages, based on the different demand scenarios. According to financial theory, both call and put options are used to offer different types of tickets to both customer and travel agent. The American Option (an American Option can be exercised any time before the expiring date) is adopted in the booking process and this gives more flexibility to the airlines to manage the whole booking process. The model finds the optimal booking limitation for call and put option tickets, and the prices for the striking prices of the two options. Because the model proposed has significant practical meaning, a general description of how to use the model is presented. Finally, a numerical example is given to demonstrate the utilization of the model being proposed.