Airline Revenue Management

Alpha Airlines has ordered a new fleet of DC-717s. At this stage of the contract, Alpha's Operations Manager must specify the seating configuration on the aircraft that will be used in the Boston-Atlanta-Chicago-Boston circuit. Alpha flies this route once each day.

The configuration decision involves specifying how many rows will be allocated for first class and how many for tourist class. If the aircraft were configured entirely of tourist rows (containing six seats each), there would be forty rows. First class seats are wider and afford more leg room, so that, in order to make room for one first-class row (containing four seats), two tourist rows must be removed. Thus, conversion from tourist to first-class seating involves the loss of some seats, but the conversion may be appealing because the revenues are higher for first-class passengers than for tourist passengers (see Exhibit 1).

A perfect match between the configuration and the demand for seats is seldom possible. Historical data suggest a probability distribution of demand for seats on each leg (as detailed in Exhibit 2). There is another distribution for the fraction of demand that corresponds to first-class seats (Exhibit 3), whichs seems to apply on all legs, although the fraction that occurs in one market on any day is independent of the fraction in other markets. Finally, there is some chance that all seats in either seating category will be booked on a given leg when demand for that category occurs. Under present management policies, such demand is simply lost to competitors.

Exhibit 1

Revenue per Seat

Exhibit 2

Distribution of Total Demand for Seats

First-class

Tourist

minimum

most likely

maximum

Boston- Atlanta

$400

$175

Boston- Atlanta

160

180

220

Atlanta-Chicago

$400

$150

Atlanta-Chicago

140

200

240

Chicago-Boston

$450

$200

Chicago-Boston

150

200

225

Exhibit 3

Distribution of Fraction First Class

minimum

most likely

maximum

Fraction

5%

12%

15%

Probability

0.2

0.5

0.3

The fixed cost of operating the full circuit is $100,000 per day. Alpha Airlines is seeking a profit maximizing configuration.

a. What is the expected profit per day for a configuration of three first-class rows and thirty-four tourist rows? For convenience, you may allow fractional values of demand in your model. (4 points)

b. With the suggested configuration, what proportion of the days will Alpha at least break even on the Boston-Atlanta-Chicago-Boston circuit? (4 points)

c. Set up a tornado/spider analysis and identify which factors are the most significant in impacting expected profit per day for the airline? (3 points)

d. For the demand that Alpha faces, what is the maximum expected profit, and what is the seat configuration that achieves it? (3 + 3 points)

e. What is the expected seat occupancy in each sector (city pair) in first class and Tourist class (use optimum seat configuration)? Seat occupancy is percent represented by demand/capacity (2 points)

f. Executive Summary ... highlight 3 top insights from analysis for the CEO of Alpha (1 point)