Business case: revenue management at East-West airlines

Suppose that East-West airlines is a small airline that offers passenger air transportation between two major east coast cities, namely Boston and New York; two major west coast cities , namely San Francisco and Los Angeles; and one major midwest city, namely Chicago. East-West operates a hub in Chicago, at which passengers can change planes to their final destination. East-West Airlines owns and operates two identical Boeing 757 aircraft, each with capacity of 200 seats. The daily schedule of these airlines is shown in Table 10.1.

East-west offers both discounted (Q-class) and unrestricted (Y-class) fares. Discounted tickets must be purchased fourteen days in advance of flight departure. A Q-class ticket is non-refundable, non-changeable. Unrestricted fare tickets can be purchased any time up until the departure time of the flight. A Y-class ticket is fully refundable. For the purpose of this HA, we will focus exclusively on the westbound operations. Table 10.2 shows the westbound itineraries that East-West airlines. Table 10.3 show expected demand (?) for each pair of departure-destination (disregard ?).

The goal of the airline company is to choose the number of tickets for each class and each itinerary to maximize the revenue. Each flight can carry up to 200 passengers. There are no direct flights from East Coast to West Coast, so the flights to Chicago will carry some passenger that will transfer on another plane to the West coast destination.

(a) Define decision variables

(b) Define an objective function

(c) Define constraints

(d) Find optimal number of tickets for each combination of class and itinerary and the corresponding maximal revenue using Excel.

TABLE 10.1 Aircraft Departs: Arrives: The daily flight Number City Time City Time schedule for East- BOSTON 8:00AM EST CHICAGO 10:15AM CST West Airlines. CHICAGO 10:45AM CST SAN FRANCISCO 12:15PM PST NNNNPH SAN FRANCISCO 5:30PM PST CHICAGO 10:45PM CST CHICAGO 11:59PM CST BOSTON 4:30AM EST NEW YORK 7:45AM EST CHICAGO 10:15AM CST CHICAGO 10:45AM CST LOS ANGELES 12:15PM PST LOS ANGELES 5:30PM PST CHICAGO 10:45PM CST CHICAGO 11:59PM CST NEW YORK 4:45AM EST TABLE 10.2 Itinerary Q-Class Y-Class Prices of Q-Class From: To: Fare Price Fare Price and Y-Class fares for BOSTON CHICAGO $200 $230 the westbound BOSTON SAN FRANCISCO $320 $420 itineraries of East- BOSTON LOS ANGELES $400 $490 West Airlines. NEW YORK CHICAGO $250 $290 NEW YORK SAN FRANCISCO $410 $550 NEW YORK LOS ANGELES $450 $550 CHICAGO SAN FRANCISCO $200 5230 CHICAGO LOS ANGELES $250 $300 TABLE 10.3 Q-Class demand Y-Class demand The mean and Itinerary (Number of Passengers) (Number of Passengers) standard deviation From: To: of the demand for BOSTON CHICAGO 25.0 5.3 20.0 5.2 travel on Mondays BOSTON SAN FRANCISCO 55.0 5.1 40.0 6.0 on westbound BOSTON LOS ANGELES 65.0 93 25.0 4.8 NEW YORK CHICAGO 24.0 4.4 16.0 3.0 flights at East-West NEW YORK SAN FRANCISCO 65.0 8.4 50.0 6.9 Airlines. NEW YORK LOS ANGELES 40.0 5.1 35.0 6.3 CHICAGO SAN FRANCISCO 21.0 6.2 20.0 3.7 CHICAGO LOS ANGELES 25.0 5.2 14.0 2.4