Capacity Management Schemes for Dual Cabin Aircraft: Airline Revenue Management Insights

176 Pages·2016·2.97 MB·English

by  Germán Escovar

Capacity Management Schemes for Dual Cabin Aircraft: Airline Revenue
Management Insights

by

Germán Escovar Álvarez
B.S. Industrial Engineering
Universidad de los Andes, Colombia (2007)

Submitted to the Department of Civil and Environmental Engineering in partial Fulfillment of the
Requirements for the Degree of

MASTER OF SCIENCE IN TRANSPORTATION

at the

MASSACHUSETTS INSTITUTE OF TECHNOLOGY

June 2016

© 2016 Massachusetts Institute of Technology. All rights reserved.

Author…………………………………………………………………………………………………………………………………………..
Department of Civil and Environmental Engineering
May 13, 2016

Certified by…………………………………………………………………………………………………………………………………...
Peter P. Belobaba
Principal Research Scientist of Aeronautics and Astronautics
Thesis Supervisor

Accepted by…………………………………………………………………………………………………………………………………..
Heidi Nepf
Donald and Martha Harleman Professor of Civil and Environmental Engineering
Chair, Graduate Program Committee

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Capacity Management Schemes for Dual Cabin Aircraft: Airline Revenue
Management Insights

by

Germán Escovar Álvarez
Submitted to the Department of Civil and Environmental Engineering
on May 13, 2016, in Partial Fulfillment of the Requirements for the Degree of
Master of Science in Transportation

Abstract

The selection of an aircraft type has long term effects on the competitive position of the airline. In a
market that is continuously evolving, such as the commercial aviation industry, any degree of
flexibility for adjusting an aircraft capacity to match better the demand provides an opportunity for
airlines to remain profitable when conditions have changed.
This thesis focuses on airlines operating dual cabin aircraft (premium and economy cabins) and
explores two alternatives that can be used to adjust the capacity made available to maximize
revenues. On the one hand, an easily implementable strategy of premium cabin capacity sharing is
proposed with the intention of allowing passengers booking in economy fare classes to be
accommodated in premium cabin seats when these seats are expected to be empty. On the other
hand, a medium to long-term solution of changing the aircraft configuration (through aircraft
replacement or retrofit) is considered. Both alternatives are tested using simulation tools that
incorporate revenue management concepts and passenger decision making.
Four heuristics are developed and tested to evaluate premium cabin capacity sharing. Based on the
simulations, it is found that the methodologies proposed can generate total revenue gains of up to
1.1%. Nevertheless, two caveats are identified: first, losses in the revenue captured from premium
fare classes are likely to be experienced due to displacement by economy fare class passengers.
Second, premium cabin capacity sharing should only be implemented in the final stages of the
booking process; otherwise, the sharing heuristics could result in revenue losses for the airline.
With respect to cabin configuration analysis, an analytical model based on the Boeing-Swan Spill
Model (BSM) is applied to dual cabin aircraft and is used to estimate the impacts on revenue due to
a change in configuration. These results are compared to the results of the simulations and it is
found that the BSM is able to predict in most cases whether the configuration change will generate
revenue gains or losses for the airline. However, estimates of the dual cabin BSM ignore the
interaction between passengers of both cabins, leading to incorrect estimates of load factors and
average revenue values of spilled or accommodated passengers.

Thesis Supervisor: Peter P. Belobaba
Title: Principal Research Scientist of Aeronautics and Astronautics
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Acknowledgments

I would like to express my gratitude to Professor Peter Belobaba for his guidance, advice and
support over the last two years. It was a privilege to learn, work, and exchange ideas with an expert
in the field. His emphasis on time management (and deadlines!) and his dedication of time were key
elements for the success of this thesis. Moreover, his decision of offering me a Research
Assistantship that allowed funding my studies was essential to make my MIT experience possible.
I would also like to thank Craig Hopperstad not only for his help developing the PODS capabilities
required for my thesis but also for his responsiveness, patience and good attitude.
I thank Mr. Bockelie (Adam), Mr. Bachwich (Alex), Salz (Alex), Daniel George Ambrose, Monsieur de
Vergnes (Matthieu), Mr. Wittman (Mike) and Mr. Petraru (Oren) for being a great team to work
with. They made it easier for me to survive the PODS conferences and helped to make our trips to
Montreal, Atlanta, Houston and Dallas enjoyable. It was also great that we were able to keep our lab
working 24/7 (as an airline!) by combining our “shifts”. In addition, I would like to thank my MST
friends Javier, Alice, Nate, Katie, Ryota (Tommy) and Patton for the great moments I have shared
with them.
Finally, I thank my parents, my girlfriend and my family for their unconditional love and support
throughout these years.

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Table of Contents

1. Introduction ................................................................................................................................................................... 15
1.1 Differential Pricing and Revenue Management ..................................................................................... 15
1.2 Fleet Planning and Aircraft Configuration Process .............................................................................. 17
1.3 Motivation for Research .................................................................................................................................. 21
1.4 Thesis Outline ...................................................................................................................................................... 23
2. Literature Review ........................................................................................................................................................ 24
2.1 Revenue Management ...................................................................................................................................... 24
2.2 Multiple Cabin Revenue Management ....................................................................................................... 26
2.3 Spill Estimation and Impacts on Fleet Assignment .............................................................................. 29
2.4 Summary ................................................................................................................................................................ 33
3. Methodology .................................................................................................................................................................. 34
3.1 Passenger Origin Destination Simulator (PODS) .................................................................................. 34
3.2 Network V1 ........................................................................................................................................................... 41
3.3 Baseline Scenarios ............................................................................................................................................. 48
3.4 Cabin Configuration Analysis ........................................................................................................................ 51
3.5 Premium Cabin Capacity Sharing Mechanisms ..................................................................................... 57
3.6 Summary ................................................................................................................................................................ 63
4. Cabin Configuration Analysis .................................................................................................................................. 64
4.1 Aircraft Types and Configuration Descriptions ..................................................................................... 64
4.2 Analytical Method for Evaluating Configuration Changes ................................................................ 68
4.3 Simulations ........................................................................................................................................................... 77
4.4 Differences between Analytical Model and Simulations .................................................................... 87
4.5 Summary ............................................................................................................................................................. 105
5. Premium Cabin Capacity Sharing Schemes .................................................................................................... 107
5.1 Leg-based RM Premium Cabin Capacity Sharing Schemes ............................................................ 107
5.2 OD-Control RM Premium Cabin Shared Capacity Schemes ........................................................... 123
5.3 Summary ............................................................................................................................................................. 163
6. Conclusions.................................................................................................................................................................. 166
6.1 Dual Cabin Aircraft Capacity Management ........................................................................................... 166
6.2 Insights from Cabin Configuration Analysis......................................................................................... 167
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6.3 Insights from Premium Cabin Capacity Sharing................................................................................. 168
6.4 Suggestions for Future Research .............................................................................................................. 172

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List of Figures

Figure 1-1: Major US airline Boeing 767 and Boeing 777 seats by aircraft .................................................. 18
Figure 1-2: Factors considered in the evaluation of aircraft cabin configurations .................................... 21
Figure 3-1: PODS Architecture ......................................................................................................................................... 35
Figure 3-2: Demand Arrival by Passenger Type ....................................................................................................... 36
Figure 3-3: EMSR curve and booking limits ............................................................................................................... 39
Figure 3-4: ProBP Algorithm ............................................................................................................................................ 40
Figure 3-5: Airline 1 Route Map. Source: Belobaba, 2010. ................................................................................... 42
Figure 3-6: Airline 2 Route Map. Source: Belobaba, 2010. ................................................................................... 43
Figure 3-7: Airline 3 Route Map. Source: Belobaba, 2010. ................................................................................... 43
Figure 3-8: Airline 4 Route Map. Source: Belobaba, 2010. ................................................................................... 44
Figure 3-9: Airline passenger share by cabin and product – Leg-based RM Medium Demand Baseline
....................................................................................................................................................................................................... 50
Figure 3-10: Airline revenue share by cabin and product– Leg RM Control Medium Demand
Baseline...................................................................................................................................................................................... 51
Figure 3-11: Alternate configurations for baseline configuration PC 20 – EC 150 .................................... 53
Figure 3-12: Alternate configurations for baseline configuration PC 30 – EC 250 .................................... 54
Figure 3-13: Full EMSR shared capacity ...................................................................................................................... 59
Figure 3-14: Premium cabin bid price control for a single leg itinerary ........................................................ 62
Figure 4-1: BSM Model - Total Revenue Proportional Variation – Aircraft Type A - Leg-RM................ 71
Figure 4-2: BSM Model – Proportional Variation Revenue on legs operated by A/C Type A - Leg-RM
....................................................................................................................................................................................................... 72
Figure 4-3: BSM Model - Proportional Variation Revenue on legs operated by A/C Type A – OD-
Control ....................................................................................................................................................................................... 73
Figure 4-4: BSM Model – Proportional Variation Revenue in legs operated by A/C Type B – Leg-RM
....................................................................................................................................................................................................... 74
Figure 4-5: BSM Model - Absolute Revenue Variations by Leg Category - Aircraft Type B - Leg-RM 75
Figure 4-6: BSM Model – Proportional Variation Revenue on legs operated by A/C Type B - OD-
control ........................................................................................................................................................................................ 75
Figure 4-7: BSM Model – Proportional Variation Revenue in legs operated by A/C Type C - Leg-RM
....................................................................................................................................................................................................... 76
Figure 4-8: BSM Model – Proportional Variation Revenue in legs operated by A/C Type C - OD-
control ........................................................................................................................................................................................ 77
Figure 4-9: PODS - Total Revenue Proportional Variation – Aircraft Type A - Leg-control ................... 78
Figure 4-10: PODS - Proportional Revenue Variation by set of legs – Aircraft Type A – Leg Control 79
Figure 4-11: PODS - Absolute Revenue Variation by set of legs – Aircraft Type A – Leg Control ........ 80
Figure 4-12: PODS - Proportional Revenue Variation by set of legs – Aircraft Type A – OD-Control 81
Figure 4-13: PODS - Absolute Revenue Variation by set of legs – Aircraft Type A – OD Control ......... 81
Figure 4-14: PODS - Proportional Revenue Variation by set of legs – Aircraft Type B – Leg Control 82
Figure 4-15: PODS - Absolute Revenue Variation by set of legs – Aircraft Type B – Leg Control ........ 83
Figure 4-16: PODS - Proportional Revenue Variation by set of legs – Aircraft Type B – OD-Control 84
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Figure 4-17: PODS - Proportional Revenue Variation by set of legs – Aircraft Type C – Leg Control 85
Figure 4-18: PODS - Proportional Revenue Variation by set of legs – Aircraft Type C – OD Control . 86
Figure 4-19: Passenger Loads by Fare Class in the Baseline – Legs Operated by Aircraft Type A - Leg
Control - Medium Demand ................................................................................................................................................ 88
Figure 4-20: Revenue by Fare Class in the Baseline – Legs Operated by Aircraft Type A - Leg Control
- Medium Demand ................................................................................................................................................................. 89
Figure 4-21: Absolute Variation of Passenger Loads by Fare Class – Legs Operated by Aircraft Type
A - Leg Control - Medium Demand ................................................................................................................................. 90
Figure 4-22: Absolute Variation of Revenue by Fare Class – Legs Operated by Aircraft Type A - Leg
Control - Medium Demand ................................................................................................................................................ 91
Figure 4-23: Passenger Loads by Fare Class in the Baseline – Legs Operated by Aircraft Type C - Leg
Control - Medium Demand ................................................................................................................................................ 93
Figure 4-24: Revenue by Fare Class in the Baseline – Legs Operated by Aircraft Type C - Leg Control
- Medium Demand ................................................................................................................................................................. 93
Figure 4-25: Absolute Variation of Passenger Loads by Fare Class – Legs Operated by Aircraft Type
C - Leg Control - Medium Demand .................................................................................................................................. 95
Figure 4-26: Absolute Variation of Revenue by Fare Class – Legs Operated by Aircraft Type C - Leg
Control - Medium Demand ................................................................................................................................................ 95
Figure 4-27: Leg Load Factor Estimation for aircraft type A in Configuration 126-28 – Leg Control 99
Figure 4-28: Load Factor differences between BSM and PODS - Aircraft type A in Configuration 138-
24 – Leg-based RM ............................................................................................................................................................. 100
Figure 4-29: Leg Load Factor Estimation for aircraft type A in Configuration 174-12 – Leg Control
.................................................................................................................................................................................................... 101
Figure 4-30: Load Factor differences between BSM and PODS - Aircraft type C in Configuration 218-
42 – Leg Control .................................................................................................................................................................. 102
Figure 4-31: Load Factor differences between BSM and PODS - Aircraft type A in Configuration 282-
18 – Leg Control .................................................................................................................................................................. 102
Figure 4-32: Average of the difference in percentage points – Aircraft Type A ....................................... 103
Figure 4-33: Average of the difference in percentage points – Aircraft Type B ....................................... 104
Figure 4-34: Average of the difference in percentage points – Aircraft Type C ....................................... 104
Figure 5-1: Full EMSR- Total Revenue Proportional Variation by Airline .................................................. 108
Figure 5-2: Full EMSR - Proportional Revenue Gains by Fare Class Type .................................................. 109
Figure 5-3: Full EMSR - Absolute Revenue Variations by Fare Class Type ................................................. 110
Figure 5-4: Full EMSR - Absolute Revenue Variation by Fare Class Type and Cabin Accommodation
.................................................................................................................................................................................................... 111
Figure 5-5: Full EMSR - Revenue Variation by Fare Class and Demand Level .......................................... 112
Figure 5-6: Closure Rate Fare Class 1 – Time Frames 11 to 16 ....................................................................... 114
Figure 5-7: Closure Rate Fare Class 5 – Time Frames 11 to 16 ....................................................................... 115
Figure 5-8: Closure Rate Fare Class 10 – Time Frames 1 to 8 .......................................................................... 115
Figure 5-9: Time Frame Protection – Full EMSR – Low Demand ................................................................... 117
Figure 5-10: Time Frame Protection - Full EMSR - Medium Demand .......................................................... 118
Figure 5-11: Time Frame Protection - Full EMSR - High Demand ................................................................. 118
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