Market-Oriented Airline Service Design

Abstract

The decision of an airline about its service offering is a challenging task as it involves various decisions at the interface of operations and marketing: which origin-destination (OD) markets to serve, over which routes, and at which departure times (schedule design), at which price and other ticket conditions (pricing/fare product design), and what aircraft type to assign to each of these flights (fleet assignment). These decisions are highly interdependent with regard to their profit impact: on the one hand, the fleeted schedule fixes a large part of the cost; on the other hand, schedule, price and fare conditions are the most important factors influencing passenger’s choice and thus revenue. While schedule- and fare-related decisions are often treated in isolation in airline planning, profit maximizing service design should encompass the simultaneous determination of all features in the service package that drive profit. We develop a market-oriented model for airline network service design integrating flight schedule design, fleet assignment and pricing. Under suitable assumptions, the model is a mixed-binary problem with concave objective function and linear constrained that can be solved exactly by standard techniques. The optimal solution obtained at the strategic level can be used as input for operational revenue management models providing an interface for hierarchical decision making.