This document provides an overview of techniques for airline revenue management that have been developed between 1982 and 2001. It summarizes the key concepts and approaches for the seat inventory control problem, which involves allocating a flight's finite seat capacity to maximize revenue over time. The document outlines static and dynamic, single-leg and network solution methods. Static single-leg approaches determine optimal booking limits for fare classes based on demand forecasts, while dynamic methods use booking data over time. Network solutions optimize across connected flight segments simultaneously.
The concepts of yield management in the airline industry have an impact on customer feelings of price fairness, also affecting customer loyalty.
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Revenue management is the practice of maximizing revenue from a fixed inventory of airline seats. It originated in the 1970s after airline deregulation in the US. Revenue management systems deliver 3-9% additional revenue gains through analytics-based inventory control and price differentiation. They help airlines set optimal booking limits and prices to reduce unsold seats and maximize revenue based on demand forecasts. While revenue management is widely used, integration challenges remain for some airlines.
This virtual simulation program was developed to help airline management teams understand competitive market dynamics and improve problem solving and decision-making skills.
Find out more at: http://www.iata.org/airline-business-simulation
The document discusses airline pricing policies and strategies. It notes that pricing decisions must consider products offered and that airlines invest in premium cabins to justify higher prices. While regulation previously constrained pricing, deregulation has led to more dynamic pricing updated daily. Airlines employ differential pricing, offering lower leisure fares to increase sales while maintaining high business class fares. Conditions like minimum stays are placed on discounted fares. Airlines must balance responding to competitors' prices against risking unprofitability and carefully manage controllable versus uncontrollable costs when considering price changes.
Revenue Management is the application of disciplined analytics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth. The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price and with the right pack. The essence of this discipline is in understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment
The document provides guidelines on using operations research for scheduling and revenue management in the airline industry. It discusses optimization methods for two subproblems: [1] fleet assignment, which involves assigning aircraft types to flight legs while maximizing profit; and [2] maintenance routing, which identifies aircraft rotations that allow for maintenance checks while satisfying operational constraints. The author conducted research on practices used by major airlines and solution vendors, focusing on decomposition approaches and solving methods like column generation and branch and bound for modeling and optimizing these problems.
Airline pricing strategies and revenue managementAMALDASKH
Revenue management is a technique airlines use to optimize revenue from a fixed resource (seats on flights) by selling to the right customers at the right price. It implements supply and demand principles tactically. Key capabilities include forecasting demand and customer price sensitivity to set optimal prices, allocating inventory efficiently, and responding quickly to changes. Cargo revenue management similarly aims to enhance profits across a network. Airlines employ various pricing strategies considering costs, sales goals, competition, and customer value over time. Popular strategies include premium, penetration, economy, price skimming, competition-based, and cost-plus pricing. Demand is inversely related to price - as price falls, quantity demanded rises, and vice versa. Non-price factors
This document discusses airline pricing and revenue management. It covers the development of airline fares from regulated prices set by IATA to deregulation and fare wars. Airlines now use revenue management techniques to set demand-based prices and optimize profits by selling the same product at different prices. This allows charging higher prices to customers who are willing to pay more, such as last-minute travelers. The document also examines metrics like cabin factor, average fare, and revenue per seat kilometer used in revenue analysis, as well as price discrimination methods like minimum stay conditions used to prevent high spenders from accessing lower fares.
The concepts of yield management in the airline industry have an impact on customer feelings of price fairness, also affecting customer loyalty.
Website: tts.com
Blog: blog.tts.com
Facebook: facebook.tts.com
Linkedin: linkedin.tts.com
Google Plus: googleplus.tts.com
Youtube: youtube.tts.com
Revenue management is the practice of maximizing revenue from a fixed inventory of airline seats. It originated in the 1970s after airline deregulation in the US. Revenue management systems deliver 3-9% additional revenue gains through analytics-based inventory control and price differentiation. They help airlines set optimal booking limits and prices to reduce unsold seats and maximize revenue based on demand forecasts. While revenue management is widely used, integration challenges remain for some airlines.
This virtual simulation program was developed to help airline management teams understand competitive market dynamics and improve problem solving and decision-making skills.
Find out more at: http://www.iata.org/airline-business-simulation
The document discusses airline pricing policies and strategies. It notes that pricing decisions must consider products offered and that airlines invest in premium cabins to justify higher prices. While regulation previously constrained pricing, deregulation has led to more dynamic pricing updated daily. Airlines employ differential pricing, offering lower leisure fares to increase sales while maintaining high business class fares. Conditions like minimum stays are placed on discounted fares. Airlines must balance responding to competitors' prices against risking unprofitability and carefully manage controllable versus uncontrollable costs when considering price changes.
Revenue Management is the application of disciplined analytics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth. The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price and with the right pack. The essence of this discipline is in understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment
The document provides guidelines on using operations research for scheduling and revenue management in the airline industry. It discusses optimization methods for two subproblems: [1] fleet assignment, which involves assigning aircraft types to flight legs while maximizing profit; and [2] maintenance routing, which identifies aircraft rotations that allow for maintenance checks while satisfying operational constraints. The author conducted research on practices used by major airlines and solution vendors, focusing on decomposition approaches and solving methods like column generation and branch and bound for modeling and optimizing these problems.
Airline pricing strategies and revenue managementAMALDASKH
Revenue management is a technique airlines use to optimize revenue from a fixed resource (seats on flights) by selling to the right customers at the right price. It implements supply and demand principles tactically. Key capabilities include forecasting demand and customer price sensitivity to set optimal prices, allocating inventory efficiently, and responding quickly to changes. Cargo revenue management similarly aims to enhance profits across a network. Airlines employ various pricing strategies considering costs, sales goals, competition, and customer value over time. Popular strategies include premium, penetration, economy, price skimming, competition-based, and cost-plus pricing. Demand is inversely related to price - as price falls, quantity demanded rises, and vice versa. Non-price factors
This document discusses airline pricing and revenue management. It covers the development of airline fares from regulated prices set by IATA to deregulation and fare wars. Airlines now use revenue management techniques to set demand-based prices and optimize profits by selling the same product at different prices. This allows charging higher prices to customers who are willing to pay more, such as last-minute travelers. The document also examines metrics like cabin factor, average fare, and revenue per seat kilometer used in revenue analysis, as well as price discrimination methods like minimum stay conditions used to prevent high spenders from accessing lower fares.
The document discusses improved forecast accuracy in airline revenue management. It aims to improve demand forecasts by addressing the challenge of censored data, which occurs when demand estimates are constrained by booking limits. The author analyzes various methods for "unconstraining" censored data to obtain better estimates of true demand. The goal is to determine which unconstraining methods produce the most accurate forecasts and improve revenue.
This document discusses marketing strategies for airlines. It begins by defining marketing and noting that marketing involves identifying customer needs profitably. It then discusses trends in the airline business market, including greater use of low-cost airlines and non-refundable tickets. The document also discusses how airlines can segment the market, such as by value, length of travel, and purpose of travel. Finally, it discusses the marketing mix of product, price, place and promotion as key elements in an airline's marketing strategy.
Revenue management first appeared in the airline industry in the early 1980s. It arose from the need for accurate demand estimates and profit-generating resource allocations in a newly deregulated environment. We begin this program and this module with a look back at the main causes and consequences of airline deregulation in North America. We describe how the deregulated North American airline industry has encouraged a trend toward deregulation, or at least liberalization, worldwide. We then move on to introduce the basic concept involved in airline revenue management.
This document provides information about airline business, including major aircraft manufacturers, aircraft types, minimum connecting times, and classes of service. It discusses key aircraft manufacturers like Boeing, Airbus, Embraer, Bombardier, and Tupolev. It describes different types of aircraft like passenger, cargo, and combination aircraft. It also outlines components of aircraft like wings, empennage, fuselage. The document explains minimum connecting times required by airlines and defines classes of service on flights.
This document discusses Porter's five forces model and its application to the airline industry. It analyzes the competitive forces of industry rivalry, threat of substitution, threat of new entry, bargaining power of customers and suppliers in the aviation industry. It also discusses Porter's generic strategies of cost leadership, differentiation and focus and how airlines have implemented these strategies. Common mistakes in airline marketing strategies are outlined such as unclear objectives, improper diversification, overexpansion and overoptimism. Alliance strategies between airlines are also covered.
Yes, tourist attractions could benefit from applying yield management principles. Here are some examples of how they could implement it:
- Offer different ticket prices for peak vs off-peak times, with higher prices during peak summer months and holidays and lower prices in the off-season.
- Offer early bird discounts for tickets purchased far in advance but increase prices as the date gets closer.
- Implement different ticket categories like general admission vs VIP tours with amenities to segment customers by willingness to pay.
- Use dynamic pricing that adjusts ticket prices in real-time based on current and forecasted demand levels. Prices would rise on busy dates and fall when demand is low.
- Overbook VIP tours or special
This document discusses various pricing tactics used by airlines, including fare actions that change actual fare levels and adjustments to fare rules and restrictions. It provides examples of different types of fare actions like introductory fares for new routes, system-wide sales during weak periods, and segment-specific pricing. Examples of adjusting rules include changing advance purchase requirements, minimum/maximum stay durations, and directional pricing. The objective of these tactics is to maximize revenue by selling seats at the highest fares possible while balancing price-sensitive customers.
This document discusses route development strategies for airlines. It outlines analyzing supply (available seats) and demand (passengers) trends on routes to forecast performance. Three outcomes are possible: converge, where passenger growth exceeds seat growth; leveling, where growth is equal; and diverge, where passenger growth lags. Monthly seasonality patterns identify peak periods. The goal is adjusting flight frequencies, aircraft size, or other factors to achieve the annual load factor target based on supply-demand analyses. Examples of route analyses between various city pairs are also presented.
The document discusses the history and current state of the airline industry, noting that while it was once luxurious and glamorous, the industry now faces issues like mergers, fees, and unpredictable factors such as fuel costs, weather, and safety issues that challenge its stability and profitability. However, it remains an affordable way to travel, and working in the industry still provides benefits like travel perks that make it worthwhile for some.
Paul Rose has over 20 years of experience in revenue management for airlines such as British Airways and Virgin Atlantic. He discusses the history and importance of revenue management in the airline industry. Revenue management was pioneered in the 1970s by major US airlines to maximize profits following deregulation. It involves controlling inventory and prices to sell the right number of seats to the right customers at the optimal price. When implemented correctly, revenue management can increase airline revenues by 3-9%. It is now considered an essential business practice for airlines and other industries with perishable inventory like hotels.
Aviation includes all non-scheduled civil flying, both private and commercial. General aviation may include business flights, air charter, private aviation, flight training, ballooning, parachuting, gliding, hang gliding, aerial photography, foot-launched powered hang gliders, air ambulance, crop dusting, charter flights, traffic reporting, police air patrols and forest fire fighting.
Covers AIDA model and how the entire sales process will take place between the Airlines and customer.
by Yohan Dsouza
Don Bosco Institute of Technology, Kurla - MMS
This document discusses airline distribution channels. It notes that websites are currently the largest portion for most low-cost carriers (LCCs) as they allow for easy, swift booking with payment options. Mobile apps and web are the fastest growing channels, especially in Thailand. Direct booking through the airline's own B2C website has advantages over B2B channels as it avoids commissions and is cheaper. However, B2B travel agents can provide close customer relationships in some cases. Online travel agents like Traveloka are very powerful but charge commissions. Global distribution systems are important for international carriers but traditionally avoided by LCCs due to high costs.
This document discusses various aspects of airport management including lessons learned, maintenance, repair and overhaul (MRO), air traffic control (ATC), and the concerns of an airport manager. It covers terminal operations, airport access, the role of MRO, how ATC works and the systems that assist them. As an airport manager, concerns include the terminal area, landside operations, and airside facilities. Effective management of airport facilities is vital for safety and efficiency.
Ground handling involves servicing aircraft while on the ground at an airport terminal. It includes cabin cleaning, catering by unloading used and loading fresh food, ramp services like guiding aircraft into position and refueling, passenger services like check-in and boarding, and field operations like dispatching flights. A variety of equipment is used like tractors, stairs, carts, and trucks to provide power, transport passengers and supplies, and service lavatories and food. Efficient ground operations are important to decrease aircraft turnaround times and increase productivity.
Aviation personnel includes pilots, flight attendants, air traffic controllers, airport managers, and ground staff. Their duties involve safely transporting passengers and cargo to destinations, ensuring passenger safety and comfort, coordinating aircraft movements to direct air traffic, overseeing airport operations, and assisting passengers during flights. A variety of equipment is used to service aircraft on the ground, such as tractors, loaders, dollies, and refueling trucks.
This document provides an overview of air cargo logistics. It discusses what air cargo logistics is, the size of the industry, its advantages over other forms of freight, and the top 30 airlines that transport the majority of global air freight. It also outlines the key players in the industry such as integrators, all-cargo airlines, and freight forwarders. Finally, it discusses the air cargo market and industry in India as well as challenges and opportunities for future growth.
Training Slides of Aviation Preparatory Operations Management discussing the importance of Aviation.
Some Key-Points:
- The Framework of Aviation
- Operational Management of Aviation
- Rules & Regulations
For further information regarding the course, please contact:
info@asia-masters.com
www.asia-masters.com
This document discusses airline market segmentation. It begins by explaining the airline business model, including transportation of passengers and cargo, and how technology has impacted communication and logistics. It then discusses the different types of airline customers, including consumers, passengers, and decision-makers within business travel. Key factors that influence customer decisions are also outlined, and the document emphasizes the difference between apparent and true customer needs. The rest of the document focuses on market segmentation strategies for airlines, including segmenting by travel purpose, journey length, traveler origin, and customer requirements. Business and leisure travelers are specifically compared in terms of demand elasticity and airline preferences.
This document discusses entity relationship modeling for an airline reservation system. It presents an entity relationship diagram with entities like airports, airplane types, and flights. The diagram shows relationships like what airplane types can land at airports. The document explains how this models key data in an airline reservation database, including flights, reservations, customers, and airplane information. It allows queries on schedules, bookings, and other important airline data. Overall, the entity relationship diagram provides a way to logically design the database schema for an airline reservation system.
This document discusses how to calculate special IATA fares and deal with their restrictions. There are different types of special fares like excursion fares and advance purchase fares, with varying restrictions. To determine the applicable fare, analyze the itinerary against the restrictions in the fare rules, starting with the lowest fare. Restrictions include number of stopovers, minimum and maximum trip durations. Once the applicable fare is found, note the fare basis and establish the valid travel windows. Finally, explain the fare rules to the client and issue the ticket.
The document discusses improved forecast accuracy in airline revenue management. It aims to improve demand forecasts by addressing the challenge of censored data, which occurs when demand estimates are constrained by booking limits. The author analyzes various methods for "unconstraining" censored data to obtain better estimates of true demand. The goal is to determine which unconstraining methods produce the most accurate forecasts and improve revenue.
This document discusses marketing strategies for airlines. It begins by defining marketing and noting that marketing involves identifying customer needs profitably. It then discusses trends in the airline business market, including greater use of low-cost airlines and non-refundable tickets. The document also discusses how airlines can segment the market, such as by value, length of travel, and purpose of travel. Finally, it discusses the marketing mix of product, price, place and promotion as key elements in an airline's marketing strategy.
Revenue management first appeared in the airline industry in the early 1980s. It arose from the need for accurate demand estimates and profit-generating resource allocations in a newly deregulated environment. We begin this program and this module with a look back at the main causes and consequences of airline deregulation in North America. We describe how the deregulated North American airline industry has encouraged a trend toward deregulation, or at least liberalization, worldwide. We then move on to introduce the basic concept involved in airline revenue management.
This document provides information about airline business, including major aircraft manufacturers, aircraft types, minimum connecting times, and classes of service. It discusses key aircraft manufacturers like Boeing, Airbus, Embraer, Bombardier, and Tupolev. It describes different types of aircraft like passenger, cargo, and combination aircraft. It also outlines components of aircraft like wings, empennage, fuselage. The document explains minimum connecting times required by airlines and defines classes of service on flights.
This document discusses Porter's five forces model and its application to the airline industry. It analyzes the competitive forces of industry rivalry, threat of substitution, threat of new entry, bargaining power of customers and suppliers in the aviation industry. It also discusses Porter's generic strategies of cost leadership, differentiation and focus and how airlines have implemented these strategies. Common mistakes in airline marketing strategies are outlined such as unclear objectives, improper diversification, overexpansion and overoptimism. Alliance strategies between airlines are also covered.
Yes, tourist attractions could benefit from applying yield management principles. Here are some examples of how they could implement it:
- Offer different ticket prices for peak vs off-peak times, with higher prices during peak summer months and holidays and lower prices in the off-season.
- Offer early bird discounts for tickets purchased far in advance but increase prices as the date gets closer.
- Implement different ticket categories like general admission vs VIP tours with amenities to segment customers by willingness to pay.
- Use dynamic pricing that adjusts ticket prices in real-time based on current and forecasted demand levels. Prices would rise on busy dates and fall when demand is low.
- Overbook VIP tours or special
This document discusses various pricing tactics used by airlines, including fare actions that change actual fare levels and adjustments to fare rules and restrictions. It provides examples of different types of fare actions like introductory fares for new routes, system-wide sales during weak periods, and segment-specific pricing. Examples of adjusting rules include changing advance purchase requirements, minimum/maximum stay durations, and directional pricing. The objective of these tactics is to maximize revenue by selling seats at the highest fares possible while balancing price-sensitive customers.
This document discusses route development strategies for airlines. It outlines analyzing supply (available seats) and demand (passengers) trends on routes to forecast performance. Three outcomes are possible: converge, where passenger growth exceeds seat growth; leveling, where growth is equal; and diverge, where passenger growth lags. Monthly seasonality patterns identify peak periods. The goal is adjusting flight frequencies, aircraft size, or other factors to achieve the annual load factor target based on supply-demand analyses. Examples of route analyses between various city pairs are also presented.
The document discusses the history and current state of the airline industry, noting that while it was once luxurious and glamorous, the industry now faces issues like mergers, fees, and unpredictable factors such as fuel costs, weather, and safety issues that challenge its stability and profitability. However, it remains an affordable way to travel, and working in the industry still provides benefits like travel perks that make it worthwhile for some.
Paul Rose has over 20 years of experience in revenue management for airlines such as British Airways and Virgin Atlantic. He discusses the history and importance of revenue management in the airline industry. Revenue management was pioneered in the 1970s by major US airlines to maximize profits following deregulation. It involves controlling inventory and prices to sell the right number of seats to the right customers at the optimal price. When implemented correctly, revenue management can increase airline revenues by 3-9%. It is now considered an essential business practice for airlines and other industries with perishable inventory like hotels.
Aviation includes all non-scheduled civil flying, both private and commercial. General aviation may include business flights, air charter, private aviation, flight training, ballooning, parachuting, gliding, hang gliding, aerial photography, foot-launched powered hang gliders, air ambulance, crop dusting, charter flights, traffic reporting, police air patrols and forest fire fighting.
Covers AIDA model and how the entire sales process will take place between the Airlines and customer.
by Yohan Dsouza
Don Bosco Institute of Technology, Kurla - MMS
This document discusses airline distribution channels. It notes that websites are currently the largest portion for most low-cost carriers (LCCs) as they allow for easy, swift booking with payment options. Mobile apps and web are the fastest growing channels, especially in Thailand. Direct booking through the airline's own B2C website has advantages over B2B channels as it avoids commissions and is cheaper. However, B2B travel agents can provide close customer relationships in some cases. Online travel agents like Traveloka are very powerful but charge commissions. Global distribution systems are important for international carriers but traditionally avoided by LCCs due to high costs.
This document discusses various aspects of airport management including lessons learned, maintenance, repair and overhaul (MRO), air traffic control (ATC), and the concerns of an airport manager. It covers terminal operations, airport access, the role of MRO, how ATC works and the systems that assist them. As an airport manager, concerns include the terminal area, landside operations, and airside facilities. Effective management of airport facilities is vital for safety and efficiency.
Ground handling involves servicing aircraft while on the ground at an airport terminal. It includes cabin cleaning, catering by unloading used and loading fresh food, ramp services like guiding aircraft into position and refueling, passenger services like check-in and boarding, and field operations like dispatching flights. A variety of equipment is used like tractors, stairs, carts, and trucks to provide power, transport passengers and supplies, and service lavatories and food. Efficient ground operations are important to decrease aircraft turnaround times and increase productivity.
Aviation personnel includes pilots, flight attendants, air traffic controllers, airport managers, and ground staff. Their duties involve safely transporting passengers and cargo to destinations, ensuring passenger safety and comfort, coordinating aircraft movements to direct air traffic, overseeing airport operations, and assisting passengers during flights. A variety of equipment is used to service aircraft on the ground, such as tractors, loaders, dollies, and refueling trucks.
This document provides an overview of air cargo logistics. It discusses what air cargo logistics is, the size of the industry, its advantages over other forms of freight, and the top 30 airlines that transport the majority of global air freight. It also outlines the key players in the industry such as integrators, all-cargo airlines, and freight forwarders. Finally, it discusses the air cargo market and industry in India as well as challenges and opportunities for future growth.
Training Slides of Aviation Preparatory Operations Management discussing the importance of Aviation.
Some Key-Points:
- The Framework of Aviation
- Operational Management of Aviation
- Rules & Regulations
For further information regarding the course, please contact:
info@asia-masters.com
www.asia-masters.com
This document discusses airline market segmentation. It begins by explaining the airline business model, including transportation of passengers and cargo, and how technology has impacted communication and logistics. It then discusses the different types of airline customers, including consumers, passengers, and decision-makers within business travel. Key factors that influence customer decisions are also outlined, and the document emphasizes the difference between apparent and true customer needs. The rest of the document focuses on market segmentation strategies for airlines, including segmenting by travel purpose, journey length, traveler origin, and customer requirements. Business and leisure travelers are specifically compared in terms of demand elasticity and airline preferences.
This document discusses entity relationship modeling for an airline reservation system. It presents an entity relationship diagram with entities like airports, airplane types, and flights. The diagram shows relationships like what airplane types can land at airports. The document explains how this models key data in an airline reservation database, including flights, reservations, customers, and airplane information. It allows queries on schedules, bookings, and other important airline data. Overall, the entity relationship diagram provides a way to logically design the database schema for an airline reservation system.
This document discusses how to calculate special IATA fares and deal with their restrictions. There are different types of special fares like excursion fares and advance purchase fares, with varying restrictions. To determine the applicable fare, analyze the itinerary against the restrictions in the fare rules, starting with the lowest fare. Restrictions include number of stopovers, minimum and maximum trip durations. Once the applicable fare is found, note the fare basis and establish the valid travel windows. Finally, explain the fare rules to the client and issue the ticket.
This document provides an introduction to air travel consolidators. It defines different types of consolidators, including wholesale consolidators that sell to travel agents, retail consolidators that sell directly to the public, and discount travel agencies. Consolidators purchase blocks of airline seats at discounted rates from airlines and resell them at below retail prices. This allows travelers to find bargain fares, especially on short notice or during peak travel seasons. The document outlines some of the savings that can be found through consolidator fares compared to airline prices, as well as some of the tradeoffs regarding customer service.
The document discusses various systems used in airline management, including reservation systems, revenue management systems, baggage handling systems, flight communication systems, and customer relationship management (CRM) systems. It describes how these systems work and how they help airlines efficiently manage operations, pricing and revenue, maintenance, flight schedules, baggage tracking, and customer relationships. Technology plays a key role in precisely coordinating these complex airline processes.
The document instructs the reader to review questions at the end of Chapter 10, provides an email for any clarification questions, and asks that any submissions be sent by the following week.
An introduction to Tourism in a Flipped ClassroomEdutour
A special teachers version of this presentation. Apart from the complete presentation, it contains teachers background information about the included concepts. The presentation is an introduction into Travel and Tourism for those interested in gaining more knowledge about this industry, like tourism students of colleges and universities. It builds an introductory understanding of travel and tourism as an area of study, It highlights all factors which are part of the Tourism System and explains the dynamics of the industry. Important concepts of supply, demand, destinations and players and their business models, are explained in an easy to understand way. Also can be used as an appetizer when introducing a new subject in your course
This document provides an introduction to revenue management. It discusses the history of revenue management in industries like airlines, car rentals, and hotels. It defines common terms like selling the right product to the right customer at the right time and price. It also discusses what revenue management is and is not, such as it is about maximizing revenue through business mix decisions rather than finance or reservations. The document shows how a hotel can optimize its business mix across customer segments to improve profits and cites a study finding hotels with revenue managers earn 4% more revenue on average. It encourages hiring a dedicated revenue manager to boost a hotel's bottom line.
AMIS is an aviation management information system developed in 1980 that provides a powerful integrated computer system for managing the technical operations of an aircraft or aircraft fleet operator. It runs on open source Linux technology and uses a relational database with both a GUI and character interface. The system features real-time data updates, 10 robust modules, user-friendly interfaces, and the ability to track aircraft maintenance status, perform maintenance planning and control, manage documents and modifications, control inventory and materials, perform financial management, and analyze work orders and costs.
This document provides an overview of yield/revenue management. It defines key terms and explains the goal of maximizing revenue through integrated control of capacity and price. The document outlines revenue management processes like pricing strategy, inventory management, and selling strategy. It also discusses measuring success through RevPAR and the role of the global distribution system.
Airline Revenue - Case Study and Industry AnalysisFrank A.
Airlines are facing increased pressure to cut costs and optimize revenue. Technology and other innovative ideas will be presented to harness all the resources necessary to be as efficient and cost effective as possible. The advent of Big Data for the Airline industry is coming at exactly the right time. Just over 100 years in the making, the industry is poised to flourish. New entrants and globalization of the world economy through communication mediums are giving rise to demanding business models that strive to get and keep market share. It will be imperative for all industry players to use data and integrate into all cost saving and profit based business initiatives. This paper illustrates and investigates many spheres of the airline industry including all the facets where airlines may increase revenue, streamline processes, cut costs, and become as cost efficient as possible.
This document discusses revenue management strategies for hotels. It explains that revenue management maximizes revenue by forecasting demand and adjusting room rates and availability. Key aspects of revenue management include capacity management, discount allocation, and duration control. Revenue management considers different guest segments and combines occupancy rates and average daily rates to measure overall room revenue performance. Forecasting demand accurately is critical for revenue management to work effectively.
This document discusses the concept of yield management in the hotel industry. It begins by defining yield management as a technique used to maximize room revenue by adjusting room rates based on supply and demand. It then explains how yield management originated in the airline industry for perishable assets and has expanded to other industries like hotels. The document covers key aspects of a hotel yield management system including capacity management, discount allocation, and duration control to optimize room prices and revenue. It provides examples of formulas used to calculate metrics like potential average rates, achievement factors, and yield.
http://www.scenic.com | The year 2016 will see further technological developments that enhance the travel experience. These various high-tech innovations include further upgrades in “virtual travel” technology, drone photography, Wi-Fi, and more.
The Southeast Asian e-commerce market is expected to grow exponentially, reaching $88 billion by 2025 at a 32% compound annual growth rate. This growth will be driven by factors like Southeast Asia's young population, rising internet usage, GDP growth, and lack of physical retail access. Reaching its full potential will require addressing challenges such as developing talent, improving payment and logistics infrastructure, and building consumer trust in online transactions. Significant investment will also be needed to fully unlock the $200 billion regional digital economy.
This document discusses revenue management in the airline industry. It explains that revenue management aims to sell airline seats to the right customers at the right time for the right price in order to maximize revenue. This is achieved through optimizing flight scheduling, pricing, and inventory control, including developing optimal overbooking policies. The document also discusses how yield management uses booking limits and protection of seats to optimize revenue from different fare classes and passenger types.
Profit Maximization is addressing Multi-stop operating model of Airlines, it shows how to max. profit in terms of CASK and RASK analysis, delivering the best seniario to select the aircraft then the best result to operate the right segment
Running head: MANAGEMENT
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MANAGEMENT
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Operations Management in Airline Industry
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Airline industry has a positive impact on the people’s way of living. It has now become a very essential service hard to picture how life would be without it. It has changed on the way people operate in the world of business because now time taken to travel long distances is very short. It is now possible to do business in some areas which were considered to be remote way back. It provides the necessary transportation network in the whole world therefore its acknowledged for the success of businesses and growth of the tourism industry (ATAG, 2005).
Aviation industry is a major source of employment and by paying taxes it contributes much to the economy. It has been experiencing a considerable growth in the last decades. Its approximately above seventy-fold as the time the first airliner flew (ATAG, 2005). That huge growth experienced is due to many factors. One of them is increase in disposable income which has led to improved living standards in the world.
The growth is also as a result of improved aviation laws and open- sky negotiations between different governments. It has led to discovery of new markets making travel affordable and easier. Increased demand due to high levels of confidence in air travel as a proved safe means of travel has also contributed to the enormous growth.
Due to increased competition, airfares have reduced therefore low cost in traveling. Globalization has also played major role as the distance traveled has increased since people are doing business everywhere due to stable political and social climate. These factors are expected to improve further thus increased no of traffic in air travel. It is now to the companies in the industry to utilize the advantage of the available opportunities and improve in the management of their work.
Most of the airlines are owned by the government but now there is an emerging trend of movement to commercial, independent public companies. This has led to increased number of commercial companies thus increased pressure on management in increased profits, reduction of cost and revenue increment.
The operators in this industry survive in a very competitive and dynamic environment. First this industry was created for the service of delivering mails. There has been massive evolution into very complicated operations of transport to passengers and cargo. All these improvements come with a very complex operating strategies and a lot of competition.
To attain a considerable growth, it is important for the airline companies to study the conditions prevailing in the market. This industry involves very high investment costs, operation in a geographically dispersed market and tough huddles imposed by the regulator. Therefore this has led to huge investment in operations techniques and information.
The industry has been divided into different sectors. They include ope.
How can airlines improve the customer experience, revive brand loyalty and undo the effects of years of cost-cutting?
Read more and watch videos>> http://bit.ly/FoAT
The document discusses the integration of microeconomics and human resource management in the airline industry. It begins by defining airlines and their main business models, including full-service carriers, low-cost carriers, charter airlines, and cargo airlines. It then examines the use of dynamic pricing in the aviation sector, how prices are determined through yield management systems. Dynamic pricing allows airlines to maximize profits by selling seats at different price points based on factors like booking time and customer profile. Finally, the document discusses how human resource management is critical to the airline industry by helping reduce costs and improve employee productivity and satisfaction during a time of rapid industry changes.
1. The document discusses the strategies adopted by key low-cost airlines in India like SpiceJet, IndiGo, and GoAir to maintain low costs and sustain their business operations.
2. The airlines focus on cost control measures like single aircraft fleet types, point-to-point routes, online booking, and dynamic pricing. They also increase revenues through ancillary services.
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Airline revenue management
1. AIRLINE REVENUE MANAGEMENT:
AN OVERVIEW OF OR TECHNIQUES 1982-2001
KEVIN PAK AND NANDA PIERSMA
ERIM REPORT SERIES RESEARCH IN MANAGEMENT
ERIM Report Series reference number ERS-2002-12-LIS
Publication January 2002
Number of pages 23
Email address corresponding author kpak@few.eur.nl
Address Erasmus Research Institute of Management (ERIM)
Rotterdam School of Management / Faculteit Bedrijfskunde
Erasmus Universiteit Rotterdam
P.O. Box 1738
3000 DR Rotterdam, The Netherlands
Phone: +31 10 408 1182
Fax: +31 10 408 9640
Email: info@erim.eur.nl
Internet: www.erim.eur.nl
Bibliographic data and classifications of all the ERIM reports are also available on the ERIM website:
www.erim.eur.nl
2. ERASMUS RESEARCH INSTITUTE OF MANAGEMENT
REPORT SERIES
RESEARCH IN MANAGEMENT
BIBLIOGRAPHIC DATA AND CLASSIFICATIONS
Abstract With the increasing interest in decision support systems and the continuous advance of
computer science, revenue management is a discipline which has received a great deal of
interest in recent years. Although revenue management has seen many new applications
throughout the years, the main focus of research continues to be the airline industry. Ever since
Littlewood (1972) first proposed a solution method for the airline revenue management problem,
a variety of solution methods have been introduced. In this paper we will give an overview of the
solution methods presented throughout the literature.
5001-6182 Business
5201-5982 Business Science
Library of Congress
Classification
(LCC) HD 30.213 Decision support systems
M Business Administration and Business Economics
M 11
R 4
Production Management
Transportation Systems
Journal of Economic
Literature
(JEL)
C 61 Optimization Techniques; Programming Models
85 A Business General
260 K
240 B
Logistics
Information Systems Management
European Business Schools
Library Group
(EBSLG)
240 B Information Systems Management
Gemeenschappelijke Onderwerpsontsluiting (GOO)
85.00 Bedrijfskunde, Organisatiekunde: algemeen
85.34
85.20
Logistiek management
Bestuurlijke informatie, informatieverzorging
Classification GOO
85.03 Methoden en technieken, operations research
Bedrijfskunde / Bedrijfseconomie
Bedrijfsprocessen, logistiek, management informatiesystemen
Keywords GOO
Management informatie systemen, beslissingsondersteunende informatiesystemen,
management, omzet, luchtvaart
Free keywords Revenue Management, Seat Inventory Control, OR techniques, Mathematical Programming
3. Airline Revenue Management:
An Overview of OR Techniques 1982-2001
Kevin Pak*
Nanda Piersma†
January, 2002
Abstract
With the increasing interest in decision support systems and the continuous advance
of computer science, revenue management is a discipline which has received a great
deal of interest in recent years. Although revenue management has seen many new
applications throughout the years, the main focus of research continues to be the
airline industry. Ever since Littlewood (1972) first proposed a solution method for the
airline revenue management problem, a variety of solution methods have been
introduced. In this paper we will give an overview of the solution methods presented
throughout the literature.
Keywords: Revenue Management, Seat Inventory Control, OR techniques
*
Erasmus Research Institute of Management, Erasmus University Rotterdam, The Netherlands
†
Econometric Institute, Erasmus University Rotterdam, The Netherlands
4. 1
1. Introduction
1.1. Revenue Management
Companies selling perishable goods or services often face the problem of selling a
fixed capacity of a product over a finite horizon. If the market is characterized by
customers willing to pay different prices for the product, it is often possible to target
different customer segments by the use of product differentiation. This creates the
opportunity to sell the product to different customer segments for different prices, e.g.
charging different prices at different points in time or offering a higher service level
for a higher price. In order to do so, decisions will have to be made about the prices to
charge and the number of products to reserve for each customer segment. Making this
kind of decisions is the topic of revenue management.
Revenue management can be defined as the art of maximizing profit generated
from a limited capacity of a product over a finite horizon by selling each product to
the right customer at the right time for the right price. It encompasses practices such
as price-discrimination and turning down customers in anticipation of other, more
profitable customers. Revenue management originates from the airline industry,
where deregulation of the fares in the 1970's led to heavy competition and the
opportunities for revenue management schemes were acknowledged in an early stage.
The airline revenue management problem has received a lot of attention throughout
the years and continues to be of interest to this day. Other applications of revenue
management can be found in the hotel, car rental, railway and cruise-line industries
among others. The possible applications of revenue management go beyond the
tourist industries, though. The energy and television broadcast industries have been
mentioned as possible applications and it has been argued that the concept of revenue
management can even be applied to fast moving consumer goods in supermarkets.
1.2. Airline Revenue Management
An airline, typically, offers tickets for many origin-destination itineraries in various
fare classes. These fare classes not only include business and economy class, which
5. 2
are settled in separate parts of the plane, but also include fare classes for which the
difference in fares is explained by different conditions for e.g. cancellation options or
overnight stay arrangements. Therefore the seats on a flight are products which can be
offered to different customer segments for different prices. Since the tickets for a
flight have to be sold before the plane takes off, the product is perishable and revenue
management can be applied.
At the heart of airline revenue management lies the seat inventory control
problem. This problem concerns the allocation of the finite seat inventory to the
demand that occurs over time before the flight is scheduled to depart. The objective is
to find the right combination of passengers on the flights such that revenues are
maximized. The optimal allocation of the seat inventory then has to be translated into
a booking control policy, which determines whether or not to accept a booking
request when it arrives. It is possible that at a certain point in time it is more profitable
to reject a booking request in order to be able to accept a booking request of another
passenger at a later point in time.
Other important topics that have received attention in the revenue management
literature are demand forecasting, overbooking and pricing. Demand forecasting is of
critical importance in airline revenue management because booking control policies
make use of demand forecasts to determine the optimal booking control strategy. If an
airline uses poor demand estimates, this will result in a booking control strategy
which performs badly. Airlines often have to cope with no-shows, cancellations and
denied boardings. Therefore, in order to prevent a flight from taking off with vacant
seats, airlines tend to overbook a flight. This means that the airline books more
passengers on a flight than the capacity of the plane allows. The level of overbooking
for each type of passenger has been the topic of research for many years. Pricing is
obviously very important for the revenues of an airline company. In fact, price
differentiation is the starting point of the revenue management concept. Demand
forecasting, overbooking and pricing are, however, topics beyond the scope of this
paper. For an overview of the literature on these three topics we refer to McGill and
Van Ryzin (1999).
6. 3
2. Seat Inventory Control
The seat inventory control problem in airline revenue management concerns the
allocation of the finite seat inventory to the demand that occurs over time. In order to
decide whether or not to accept a booking request, the opportunity costs of losing the
seats taken up by the booking have to be evaluated and compared to the revenue
generated by accepting the booking request. Solution methods for the seat inventory
control problem are concerned with approximating these opportunity costs and
incorporating them in a booking control policy such that expected future revenues are
maximized.
Solution methods for the seat inventory control problem should account for a
number of things. The stochastic nature of demand is one of them. Also, a booking
request that creates the highest possible revenue for the airline should never be
rejected whenever a seat is available, not even when the number of seats appointed to
this type of passenger by the booking control policy has been reached. In fact, any
passenger should be allowed to tap into the capacity reserved for any other lower
valued type of passenger. This is the concept of nesting and should be incorporated
into the booking control policy. Further, we make the distinction between single leg
and network seat inventory control and static and dynamic solution methods.
With single leg seat inventory control, every flight leg is optimized separately.
Network seat inventory control is aimed at optimizing the complete network of flight
legs offered by the airline simultaneously. Consider a passenger travelling from A to
C through B. That is, travelling from A to C using flight legs from A to B and from B
to C. If the single leg approach is used, this passenger can be rejected on one of the
flight legs because another passenger is willing to pay a higher fare on this flight leg.
But by rejecting this demand, the airline loses an opportunity to create revenue for the
combination of the two flight legs. If the other flight leg does not get full, it could
have been more profitable to accept the passenger to create revenue for both flight
legs. Hence, only the network approach takes into account the overall revenue that the
passenger creates from its origin to its final destination.
The distinction between static and dynamic solution methods is a second
partitioning that can be considered. Static solution methods generate an optimal
allocation of the seats at a certain point in time, typically the beginning of the booking
period, based on a demand forecast at that point in time. The actual booking requests
7. 4
do, however, not arrive at one point in time but occur gradually over the booking
period. Therefore, a better solution method would be one that monitors the actual
demand and adjusts the booking control policy to it. This would be a dynamic
solution method.
In Section 3 we discus the single leg solution methods and in section 4 the
network solution methods to the seat inventory control problem. The solution methods
may vary with the set of assumptions made in each research, e.g. taking nesting or
network-effects into account or not. However, there are also some assumptions that all
of the researches discussed in this paper make use of. These assumptions are:
- no cancellations or no-shows
- independent demand between the booking classes
- no demand recapturing
- no batch booking
The first assumption simply states that no attention will go out to overbooking.
Usually the seat inventory control problem and overbooking are considered
separately, although integration of the two problems would be preferred and has been
given attention also. A consequence of the second assumption is that no information
on the actual demand process of one fare can be derived from the actual demand
process of another fare. We speak of demand recapturing when a low fare booking
request is turned into a higher fare booking request when the low fare class is not
available. This can occur when the products are not sufficiently differentiated. The
assumption that there is no demand recapturing implies that every customer has got a
strict preference for a certain fare class and that a denied request is lost forever. The
last assumption is that there are no batch bookings, which justifies looking at one
booking request at a time. Relaxation of these assumptions has been given attention.
However, in order to give a good impression of what is considered as the general seat
inventory control problem and its basic solution methods, we will not discuss this
here.
Finally, we would like to mention that the seat inventory control problem can
also be seen as a pricing problem. When the fare classes are well differentiated, they
are separate products. A pricing scheme can then be constructed for each fare class
and closing a fare class for future booking requests can be done artificially by setting
the price sufficiently high. In our opinion, however, the decision whether to close a
fare class or not, can be represented by more straightforward formulations than that of
8. 5
a pricing problem. Whenever the fare classes are not sufficiently differentiated, the
fare classes can be seen as different prices for the same product. Then a formulation
of the problem as a pricing problem is evident. In this paper, we will, however, not
consider this situation. Applications of pricing techniques to airline revenue
management can be found in Chatwin (2000), Feng and Gallego (1995, 2000), Feng
and Xiao (2000a, 2000b), Gallego and van Ryzin (1994, 1997), Kleywegt (2001),
You (1999) and Zhao and Zheng (2000) among others.
3. Single Leg Seat Inventory Control
In single leg seat inventory control, booking control policies for the various flight legs
are made independent of one another. There are two categories of single leg solution
methods; static and dynamic solution methods. In addition to the assumptions given in
the previous section, static single leg solution methods make use of the extra
assumption that booking requests come in sequentially in order of increasing fare
level, i.e. low fare booking requests come in before high fare booking requests. This
means that the booking period can be divided into time-periods for which all booking
requests belong to the same fare class. In this case, booking control policies can be
based on the total demand for each fare class and do not explicitly have to consider
the actual arrival process. Brumelle and McGill (1993) show that under this
assumption a static solution method that limits the number of booking requests to
accept for each fare class is optimal as long as no change in the probability
distributions of demand is foreseen. Dynamic solution methods do not assume a
specific arrival order of the booking requests. In this case, a booking control policy
based on the total demand for each fare class is no longer optimal, and dynamic
programming techniques are needed. In Section 3.1 we discuss the static solution
methods and in Section 3.2 the dynamic solution methods.
9. 6
3.1. Static Solution Methods
Littlewood (1972) was the first to propose a solution method for the seat inventory
control problem for a single leg flight with two fare classes. The idea of his scheme is
to equate the marginal revenues in each of the two fare classes. He suggests closing
down the low fare class when the certain revenue from selling another low fare seat is
exceeded by the expected revenue of selling the same seat at the higher fare. That is,
low fare booking requests should be accepted as long as
)Pr( 1112 pDff >≥ (3.1)
where f1 and f2 are the high and low fare levels respectively, D1 denotes the demand
for the high fare class, p1 is the number of seats to protect for the high fare class and
Pr(D1 > p1) is the probability of selling all protected seats to high fare passengers. The
smallest value of p1 that satisfies the above condition is the number of seats to protect
for the high fare class, and is known as the protection level of the high fare class. The
concept of determining a protection level for the high fare class can also be seen as
setting a booking limit, a maximum number of bookings, for the lower fare class.
Both concepts restrict the number of bookings for the low fare class in order to accept
bookings for the high fare class.
Belobaba (1987) extends Littlewood’s rule to multiple nested fare classes and
introduces the term expected marginal seat revenue (EMSR) for the general approach.
His method is known as the EMSRa method and produces nested protection levels,
i.e. they are defined as the number of seats protected for the fare class and all higher
classes. The EMSRa method does, however, not yield optimal booking limits when
more than two fare classes are considered.
Optimal policies for more than two classes have been presented independently
by Curry (1990), Brumelle and McGill (1993) and Wollmer (1992). Curry uses
continuous demand distributions and Wollmer uses discrete demand distributions. The
approach Brumelle and McGill propose, is based on subdifferential optimization and
admits either discrete or continuous demand distributions. They show that an optimal
set of nested protection levels, p1, p2, ..., pk-1, where the fare classes are indexed from
high to low, must satisfy the conditions:
10. 7
)()( 1 iiiii pERfpER −++ ≤≤ δδ for each i = 1, 2, ..., k-1 (3.2)
where ERi(pi) is the expected revenue from the i highest fare classes when pi seats are
protected for those classes and δ+ and δ- are the right and left derivatives with respect
to pi respectively. These conditions express that a change in pi away from the optimal
level in either direction will produce a smaller increase in the expected revenue than
an immediate increase of fi+1. The same conditions apply for discrete and continuous
demand distributions. Notice, that it is only necessary to set k-1 protection levels
when there are k fare classes on the flight leg, because no seats will have to be
protected for the lowest fare class. Brumelle and McGill show that under certain
continuity conditions the conditions for the optimal nested protection levels reduce to
the following set of probability statements:
)Pr( 1112 pDff >= (3.3)
)Pr( 2211113 pDDpDff >+∩>=
...
)......Pr( 1121221111 −− >+++∩∩>+∩>= kkk pDDDpDDpDff
These statements have a simple and intuitive interpretation, much like Littlewood’s
rule. Just like Littlewood’s rule and the EMSRa method, this method is based on the
idea of equating the marginal revenues in the various fare classes and therefore
belongs to the class of EMSR methods. The method is called the EMSRb method.
Robinson (1995) finds the optimality conditions when the assumption of a sequential
arrival order with monotonically increasing fares is relaxed into a sequential arrival
order with an arbitrary fare order. Furthermore, Curry (1990) provides an approach to
apply his method to origin-destination itineraries instead of single flight legs, when
the capacities are not shared among different origin-destinations.
Van Ryzin and McGill (2000) introduce a simple adaptive approach for
finding protection levels for multiple nested fare classes, which has the distinctive
advantage that it does not need any demand forecasting. Instead, the method uses
historical observations to guide adjustments of the protection levels. They suggest
adjusting the protection level pi upwards after each flight if all the fare classes i and
11. 8
higher reached their protection levels, and downwards if this has not occurred. They
prove that under reasonable regularity conditions, the algorithm converges to the
optimal nested protection levels. This scheme of continuously adjusting the protection
levels has the advantage that it does not need any demand forecasting and therefore is
a way to get around all the difficulties involving this practice. However the updating
scheme does need a sufficiently large sequence of flights to converge to a good set of
protection levels. In practice, such a start-up period can not always be granted when
there are profits to be made.
The solution methods in this paragraph are all static. This class of solution
methods is optimal under the sequential arrival assumption as long as no change in the
probability distributions of the demand is foreseen. However, information on the
actual demand process can reduce the uncertainty associated with the estimates of
demand. Hence, repetitive use of a static method over the booking period based on the
most recent demand and capacity information, is the general way to proceed.
3.2. Dynamic Solution Methods
Dynamic solution methods for the seat inventory control problem do not determine a
booking control policy at the start of the booking period as the static solution methods
do. Instead, they monitor the state of the booking process over time and decide on
acceptance of a particular booking request when it arrives, based on the state of the
booking process at that point in time.
Lee and Hersh (1993) consider a discrete-time dynamic programming model,
where demand for each fare class is modeled by a nonhomogeneous Poisson process.
Using a Poisson process gives rise to the use of a Markov decision model in such a
way that, at any given time t, the booking requests before time t do not affect the
decision to be made at time t except in the form of less available capacity. The states
of the Markov decision model are only dependent on the time until the departure of
the flight and on the remaining capacity. The booking period is divided into a number
of decision periods. These decision periods are sufficiently small such that not more
than one booking request arrives within such a period. The state of the process
changes every time a decision period elapses or the available capacity changes. If
U(c,t) is the optimal total expected revenue that can be generated given a remaining
12. 9
capacity of c seats and with t remaining decision periods before the departure of the
flight, then a booking request of class i is accepted if, and only if:
)1,1()1,( −−−−≥ tcUtcUfi for each i = 1, 2, ..., k, (3.4)
c = C, C-1, ..., 1, t = T, T-1, ..., 1
where C is the total seat capacity and T is the total number of decision periods. This
decision rule says that a booking request is only accepted if its fare exceeds the
opportunity costs of the seat, defined here by the expected marginal value of the seat
at time t. Lee and Hersh provide a recursive function for the total expected revenue
and show that solving the model under the decision rule given by (3.4) results into a
booking policy that can be expressed as a set of critical values for either the remaining
capacity or the time until departure. For each fare class the critical values provide
either an optimal capacity level for which booking requests are no longer accepted in
a given decision period, or an optimal decision period after which booking requests
are no longer accepted for a given capacity level. The critical values are monotone
over the fare classes. Lee and Hersh also provide an extension to their model to
incorporate batch arrivals.
Kleywegt and Papastavrou (1998) demonstrate that the problem can also be
formulated as a dynamic and stochastic knapsack problem (DSKP). Their work is
aimed at a broader class of problems than only the single leg seat inventory control
problem considered here, and includes the possibility of stopping the process before
time 0 with a given terminal value for the remaining capacity, waiting costs for
capacity unused and a penalty for rejecting an item. Their model is a continuous-time
model, but they do, however, only consider homogeneous arrival processes for the
booking requests. In a recent paper Kleywegt and Papastavrou (2001) extend their
model to allow for batch arrivals.
Subramanian et al. (1999) extend the model proposed by Lee and Hersh to
incorporate cancellations, no-shows and overbooking. They also consider a
continuous-time arrival process as a limit to the discrete-time model by increasing the
number of decision periods. Liang (1999) reformulates and solves the Lee and Hersh
model in continuous-time. Van Slyke and Young (2000) also obtain continuous-time
versions of Lee and Hersh’ results. They do this by simplifying the DSKP model to
13. 10
the more standard single leg seat inventory control problem and extending it for
nonhomogeneous arrival processes. They also allow for batch arrivals. Lautenbacher
and Stidham (1999) link the dynamic and static approaches. They demonstrate that a
common Markov decision process underlies both approaches and formulate an
omnibus model which encompasses the static and dynamic models as special cases.
4. Network Seat Inventory Control
In network seat inventory control, the complete network of flights offered by the
airline is optimized simultaneously. One way to do this, is to distribute the revenue of
an origin-destination itinerary over its legs, which is called prorating, and apply single
leg seat inventory control to the individual legs. Williamson (1992) investigates
different prorating strategies, such as prorating based on mileage and on the ratio of
the local fare levels. This approach provides a heuristic to extend the existing single
leg solution methods to a network setting. However, only a mathematical
programming formulation of the problem can be capable of fully capturing the
combinatorial aspects of the network. In order to obtain the mathematical
programming formulation for capturing these combinatorial aspects, denote an origin-
destination and fare class combination by ODF. Let XODF denote the number of seats
reserved for an ODF, DODF the demand for an ODF, and fODF the fare level for an
ODF. Further, let l denote a single flight leg, Cl the seat capacity for a leg, and Sl the
set of all ODF combinations available on a leg. The problem can then be formulated
as follows:
maximize ( )∑ODF ODFODFODF DXfE },min{ (4.1)
subject to ∑ ∈
≤
lSODF lODF CX for eachl
0≥ODFX integer for each ODF
The objective is to find the seat allocation that maximizes the total expected revenue
of the network and satisfies the capacity constraints on the various flight legs. The
objective function depends on the distributions of demand and generally is not linear,
14. 11
continuous or in any other way regular. Therefore, relaxations of this formulation
have been suggested for use in practice.
4.1 Mathematical Programming
The first full network formulation of the seat inventory control problem is proposed
by Glover et al. (1982). They formulate the problem as a minimum cost network flow
problem with one set of arcs corresponding to the flight legs and another set
corresponding to the ODF combinations. The method is aimed at finding the flow on
each arc in the network that maximizes revenue, without violating the capacity
constraints on the legs and upperbounds posed by the demand forecasts for the ODF
combinations. A drawback of the network flow formulation is that it can not always
discriminate between the routes chosen from an origin to a destination. Therefore, this
formulation only holds when passengers are path-indifferent. The advantage of the
formulation is that is it easy to solve and can be re-optimized very fast.
A formulation of the problem that is able to distinguish between the different
routes from an origin to a destination, is given by the integer programming model
underlying the network flow formulation:
maximize ∑ODF ODFODF Xf (4.2)
subject to ∑ ∈
≤
lSODF lODF CX for each l
ODFODF EDX ≤ for each ODF
0≥ODFX integer for each ODF
In this model EDODF denotes the expected demand for an ODF. It is easy to see that
this is the model obtained from model (4.1) if the stochastic demand for each ODF is
replaced by its expected value. The demand for an ODF is treated as if it takes on a
known value, e.g. as if it is deterministic, and no information on the demand
distributions is taken into account. Accordingly, the model produces the optimal seat
allocation if the expected demands correspond perfectly with the actual demands. It is
common practice to solve the LP relaxation of the model rather than the integer
15. 12
programming problem, since an integer programming problem is usually very hard to
solve. The LP relaxation of the model is known as the deterministic linear
programming (DLP) model. A booking control policy based on the DLP model can be
constructed by setting booking limits for each ODF equal to the number of seats
reserved for the ODF in the optimal solution of the model. Such a booking control
policy is a static method and, just as with the single leg methods discussed in the
previous section, the general way to proceed is to use the model repeatedly over the
booking period based on the most recent demand and capacity information.
The DLP method is a deterministic method and will never reserve more seats
for a higher fare class than the airline expects to sell on average. In order to determine
whether reserving more seats for more profitable ODF combinations can be
rewarding, it is necessary to incorporate the stochastic nature of demand in the model.
Wollmer (1986) develops a model which incorporates probabilistic demand into a
network setting.
maximize ∑ ∑ ≥ODF i ODFODFODF iXiDf )()Pr( (4.3)
subject to ∑ ∑∈
≤
lSODF li ODF CiX )( for each l
}1,0{)( ∈iXODF for each ODF,
i = 1, 2, ..., maxl{Cl:ODF∈Sl}
In this model the decision variables XODF(i) take on the value 1 when i seats or more
are reserved for the ODF, and 0 otherwise. The coefficient of each XODF(i) in the
objective function represents the expected marginal revenue of allocating an
additional ith
seat to the ODF. The model is called the expected marginal revenue
(EMR) model. A drawback of this model is the large amount of decision variables,
which makes the model impractical in use.
De Boer et al. (1999) introduce a model which is an extension of the EMR
model. It incorporates the stochastic nature of demand when demand for each ODF
can take on only a limited number of discrete values {dODF(1) < dODF(2) < ... <
dODF(NODF)}.
16. 13
maximize ∑ ∑ ≥ODF i ODFODFODFODF iXidDf )())(Pr( (4.4)
subject to ∑ ∑∈
≤
lSODF li ODF CiX )( for each l
)1()1( ODFODF dX ≤ for each ODF
)1()()( −−≤ ididiX ODFODFODF for each ODF, i = 2, 3, ..., NODF
0)( ≥iXODF integer for each ODF, i = 1, 2, ..., NODF
The decision variables XODF(i) each accommodate for the part of the demand DODF
that falls in the interval (dODF(i-1), dODF(i)]. Summing the decision variables XODF(i)
over all i for an ODF, gives the total number of seats reserved for the ODF which can
be interpreted as a booking limit. The LP relaxation of this model is called the
stochastic linear programming (SLP) model. The EMR model is a special case of the
SLP model that can be obtained by letting dODF(1) = 1 and dODF(i)-dODF(i-1) = 1 for
all i = 2, 3, ..., maxl{Cl:ODF∈Sl}. But the SLP formulation of the problem is more
flexible because it allows a reduction of the number of decision variables by choosing
a limited amount of demand scenarios. If only the expected demand is considered as a
possible scenario, the SLP model reduces to the DLP model. In fact, the DLP and
EMR models can be seen as the two extremes that can be obtained from the SLP
model. The first by considering only one demand scenario, the latter by considering
all possible scenarios.
The mathematical programming models discussed in this section are very well
capable of capturing the combinatorial aspects of the problem. The booking control
policies derived from the models are, however, static and non-nested. In the following
sections we will discuss techniques to augment the mathematical programming
models for nesting. Dynamic solution methods are discussed in Section 4.2.
4.1.1. Nesting
Nesting is an important aspect of the seat allocation problem and should be taken into
account. How to determine a nesting order of the ODF combinations is not trivial in a
network setting. The nesting order should be based on the contribution of the ODF
combinations to the network revenue. Ordering by fare class does not take into
17. 14
account the level of the fare, and ordering by fare level does not account for the load
factors of the flight legs. Williamson (1992) suggests nesting the ODF combinations
by the incremental revenue that is generated if an additional seat is made available for
the ODF while everything else remains unchanged. For the DLP model, she
approximates this by the dual price of the corresponding demand constraint. In this
particular model, this corresponds to the incremental revenue obtained from
increasing the mean demand for the ODF by one. A stochastic model typically does
not have demand constraints, but the incremental revenue obtained from increasing
the mean demand can still be used. An approximation can be obtained by re-
optimizing the model with the mean demand increased by one and comparing the new
objective value with the original objective value. This does, however, require a re-
optimization of the model.
After determining a nesting order on each flight leg, a nested booking control
policy can be constructed. Let HODF,l be the set of ODF combinations that have higher
rank than ODF on flight leg l. Then nested booking limits for an ODF on a flight leg l
are given by:
∑ ∈
−=
lODFHODF ODFllODF XCb
,* *, (4.5)
This illustrates that nested booking limits are obtained from non-nested booking limits
by allowing ODF combinations to make use of all seats on the flight leg except for the
seats reserved for higher ranked ODF combinations.
De Boer et al. (1999) stick to Williamson’s idea of using the net contribution
to network revenue of the ODF combinations to determine a nesting. However, they
use a different approach to approximate this. They approximate the opportunity costs
of an ODF combination by the sum of the dual prices of the capacity constraints of the
legs the ODF uses. An approximation of the net contribution to network revenue is
then obtained by subtracting this from the fare level. Thus, a nesting order is based
on:
∑ ∈
−=
lSODF lODFODF pff (4.6)
18. 15
where pl denotes the dual price of the capacity constraint for flight leg l. For the DLP
method this nesting method is equivalent to Williamson’s approach. The advantage of
this method over Williamson’s, is that it can be applied for a stochastic model without
re-optimizing the model.
4.1.2. Bid-Prices
A booking control policy that incorporates nesting in a natural way, is setting bid-
prices. In this procedure, a bid-price is set for each leg in the network reflecting the
opportunity costs of reducing the capacity of the leg with one seat. A booking request
is accepted only if its fare exceeds the sum of the bid-prices of the legs it uses. The
opportunity costs of selling a seat on a leg can be approximated by the dual price of
the capacity constraint of the leg in a mathematical programming model. After
obtaining the dual prices of the capacity constraints by the use of such a model, the
rule is to accept a booking request for an ODF if:
∑ ∈
>
lSODF lODF pf (4.7)
Notice that this measure is equivalent to the approximation de Boer et al. (1999) use
for the opportunity costs of an ODF and directly links the revenue gain from
accepting a booking request to the opportunity costs of the ODF. A disadvantage of
bid-price control is that there is no limit to the number of bookings for an ODF once it
is open for bookings, i.e. once its fare exceeds the opportunity costs. This can lead to
flights filling up with passengers that only marginally contribute to network revenue.
Frequently adjusting the bid-prices based on the most recent demand and capacity
information is necessary to prevent this from happening.
Williamson (1992) investigates using the DLP model for constructing bid-
prices. This method to construct bid-prices does not take into account the stochastic
nature of demand. Talluri and van Ryzin (1999) analyze a randomized version of the
DLP method for computing bid-prices. The idea is to incorporate more stochastic
information by replacing the expected demand by the random vector itself. They
simulate a sequence of n demand realizations and for each realization determine the
19. 16
optimal seat allocation. This can be done by applying the DLP model with the
realization of the demand taking the place of the expected demand as the upperbound
for the number of bookings for each ODF. The n optimal seat allocations provide n
sets of dual prices. The bid-price for a leg is simply defined as the average over the n
dual prices for the flight leg. This method is known as the randomized linear
programming (RLP) method. De Boer et al. (1999) construct bid-prices on their SLP
model.
It should be noted that both the nested booking limits and the bid-price
procedures are heuristics to convert a non-nested solution from one of the
mathematical programming models into a nested booking control policy by allowing
ODF combinations to make use of all seats reserved for the lower valued ODF
combinations. Allowing this, reduces the necessity to reserve seats for the ODF in the
model. Therefore, the solution of the model is no longer optimal. To obtain an optimal
booking control strategy that accounts for nesting, the nesting and allocation decisions
should be integrated. No mathematical programming model is capable of doing this.
A heuristic that does integrate the nesting and allocation decisions is discussed in the
next section.
4.2. Simulation Approach
In a recent study, Bertsimas and de Boer (2000) introduce a simulation based solution
method for the network seat inventory control problem. They define the expected
revenue function as a function of the booking limits and their aim is to find those
booking limits that optimize the function. The DLP model is used to generate an
initial solution which takes the combinatorial aspects of the network into account and
by which a nesting order can be determined. After that, the solution is gradually
improved to make up for factors such as the stochastic nature of demand and nesting.
The search direction is determined by the gradient of the expected revenue function.
Because the expected revenue function is not known, it is approximated by means of
simulation. The expected revenue generated by a set of booking limits is
approximated by the average of the revenues generated by the booking limits when
they are applied over a sequence of simulated demand realizations. The gradient of
20. 17
the function is approximated by the change in expected revenue caused by a small
deviation in the booking limits.
Bertsimas and de Boer reduce a great deal of the computation time of their
method by linking it to ideas from the field of approximate dynamic programming.
They devide the booking-period into smaller time-periods and define future revenue
as a function of the remaining capacity. A booking control policy for the current time-
period can then be obtained by simulating the booking process of the present time-
period only. The revenue of each simulation run is defined as the revenue within the
present time-period plus the estimated future revenue which depends on the remaining
capacity. In order to estimate the future revenue function an Orthogonal
Array/Multiple Adaptive Regression Splines method is used as in Chen et al. (1998),
which we will discuss in the next section when we present the dynamic solution
methods for network seat inventory control.
Bertsimas and de Boer also provide a method to derive bid-prices from their
booking limits by use of simulation. The bid-price for each leg is set equal to an
approximation of the opportunity costs of reducing the capacity on the leg. They
simulate a sequence of demand realizations and for each simulation calculate the
revenue resulting from using the booking limits. To obtain an approximation of the
opportunity costs, they subtract from this revenue the revenue generated by the same
booking limits if the capacity on the leg would have been decreased by one seat. The
bid-price is defined as the average of the approximated opportunity costs over the
simulations.
4.3. Dynamic Solution Methods
For the simulation based solution method discussed in the previous section, Bertsimas
and de Boer (2000) make use of approximate dynamic programming. They devide the
booking period into smaller time-periods for which booking control policies are
determined. A solution is constructed in each period taking into account the
realizations in the previous time-periods and the expectations about the future time-
periods. All other network solution methods discussed thus far, are static methods.
These methods produce a solution at a given point in time for the complete booking
period. This solution is usually adjusted a multitude of times during the booking
21. 18
period by re-optimizing the underlying models. A fully dynamic solution method,
however, would be one that adjusts the booking control policy continuously.
Chen et al. (1998) are the first to provide a fully dynamic solution method for
the network seat inventory control problem. They formulate a Markov decision model
that uses mathematical programming in a dynamic setting. As with the single leg
dynamic solution methods, the state space of the Markov decision model is defined by
the time until departure and the remaining capacities of the flights. The decision
periods are chosen sufficiently small such that not more than one booking request
arrives within such a period. Let V(c,t) be the optimal total expected revenue that can
be generated when c is the vector of remaining capacities on the flight legs and t is the
number of decision periods left before departure. Further, let aODF be the vector that
denotes whether a flight leg is used by an ODF or not; i.e. 1 if the ODF traverses the
flight leg and 0 otherwise. Then a booking request for an ODF is accepted if, and only
if:
)1,()1,( −−−−≥ tVtVfODF ODFacc for each ODF, c, (4.8)
t = T, T-1, ..., 1
where T is the total number of decision periods. The right-hand side of (4.8)
corresponds to the opportunity costs of the seats taken up by the booking request. A
booking request is accepted only if its fare exceeds the opportunity costs.
To approximate the opportunity costs, the objective value for a mathematical
programming model can be evaluated when the booking request is accepted as well as
when the booking request is rejected. Subtracting these objective values gives the
opportunity costs based on that particular model. Chen et al. (1998) argue that the
opportunity costs are overestimated by the DLP model and underestimated by a non-
nested stochastic model they formulate. Based on this idea, they formulate the
following algorithm to accept or reject a booking request for an ODF:
1. reject if fODF ≤ OCSTOCH , otherwise
2. accept if fODF ≥ OCDLP , otherwise
3. accept if fODF > x, with x random from the interval [OCSTOCH, OCDLP].
22. 19
where OCSTOCH and OCDLP denote the opportunity costs of the ODF as approximated
by the stochastic and the DLP model. Evaluating the two models in two different
states every time a booking request comes in, obviously requires a lot of computation
time. Therefore, Chen et al. propose a method to estimate the value function of a
model for each possible state beforehand. They evaluate the model on a carefully
selected limited number of points in the state space and use these observations to
estimate the value function of the model over the entire state space. The selection of
the points is based on an Orthogonal Array method, and Multivariate Adaptive
Regression Splines are used to estimate the value function of the model. With an
approximation of the value function of each model available at any time, the Markov
decision model can be used in a dynamic way.
In a recent paper Bertsimas and Popescu (2001) use the network flow
formulation of the problem, proposed by Glover et al. (1982), to approximate the
opportunity costs. Because this formulation can be re-optimized very efficiently, a
new solution can be constructed every time a booking request comes in. Bertsimas
and Popescu overcome the fact that the network flow formulation does not account
for the stochastic nature of demand by means of simulation. They simulate a sequence
of demand realizations and approximate the opportunity costs by the average of the
opportunity costs obtained from the simulations. A drawback of the network flow
formulation remains that it only holds when passengers are path-indifferent.
4. Conclusion
In this paper, we make a distinction between single leg and network solution methods
for the seat inventory control problem in airline revenue management. Apart from the
distinction between static and dynamic solution methods, literature on the single leg
approach to the problem is rather harmonious. For both the static and the dynamic
approach, a certain amount of consensus has been reached about the general way to
proceed. In recent years, literature on single leg solution methods has been aimed
mainly at extending the existing models to account for aspects such as overbooking,
batch arrivals, less dependence on demand forecasts etc. Literature on the network
solution methods is less harmonious. How to account for the combinatorial effects of
23. 20
the network, the stochastic nature of demand and nesting simultaneously, is not
trivial. Moreover, the size of the problem prescribes the use of heuristics as opposed
to optimal policies, especially if a policy is to be used in a dynamic way.
Nevertheless, we think that it is essential to account for the network effects.
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27. Publications in the Report Series Research*
in Management
ERIM Research Program: “Business Processes, Logistics and Information Systems”
2002
Equivalent Results in Minimax Theory
J.B.G. Frenk, G. Kassay & J. Kolumbán
ERS-2002-08-LIS
An Introduction to Paradigm
Saskia C. van der Made-Potuijt & Arie de Bruin
ERS-2002-09-LIS
Airline Revenue Management: An Overview of OR Techniques 1982-2001
Kevin Pak & Nanda Piersma
ERS-2002-12-LIS
2001
Bankruptcy Prediction with Rough Sets
Jan C. Bioch & Viara Popova
ERS-2001-11-LIS
Neural Networks for Target Selection in Direct Marketing
Rob Potharst, Uzay Kaymak & Wim Pijls
ERS-2001-14-LIS
An Inventory Model with Dependent Product Demands and Returns
Gudrun P. Kiesmüller & Erwin van der Laan
ERS-2001-16-LIS
Weighted Constraints in Fuzzy Optimization
U. Kaymak & J.M. Sousa
ERS-2001-19-LIS
Minimum Vehicle Fleet Size at a Container Terminal
Iris F.A. Vis, René de Koster & Martin W.P. Savelsbergh
ERS-2001-24-LIS
The algorithmic complexity of modular decompostion
Jan C. Bioch
ERS-2001-30-LIS
A Dynamic Approach to Vehicle Scheduling
Dennis Huisman, Richard Freling & Albert Wagelmans
ERS-2001- 35-LIS
*
A complete overview of the ERIM Report Series Research in Management:
http://www.ers.erim.eur.nl
ERIM Research Programs:
LIS Business Processes, Logistics and Information Systems
ORG Organizing for Performance
MKT Marketing
F&A Finance and Accounting
STR Strategy and Entrepreneurship
28. Effective Algorithms for Integrated Scheduling of Handling Equipment at Automated Container Terminals
Patrick J.M. Meersmans & Albert Wagelmans
ERS-2001-36-LIS
Rostering at a Dutch Security Firm
Richard Freling, Nanda Piersma, Albert P.M. Wagelmans & Arjen van de Wetering
ERS-2001-37-LIS
Probabilistic and Statistical Fuzzy Set Foundations of Competitive Exception Learning
J. van den Berg, W.M. van den Bergh, U. Kaymak
ERS-2001-40-LIS
Design of closed loop supply chains: a production and return network for refrigerators
Harold Krikke, Jacqueline Bloemhof-Ruwaard & Luk N. Van Wassenhove
ERS-2001-45-LIS
Dataset of the refrigerator case. Design of closed loop supply chains: a production and return network for
refrigerators
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ERS-2001-46-LIS
How to organize return handling: an exploratory study with nine retailer warehouses
René de Koster, Majsa van de Vendel, Marisa P. de Brito
ERS-2001-49-LIS
Reverse Logistics Network Structures and Design
Moritz Fleischmann
ERS-2001-52-LIS
What does it mean for an Organisation to be Intelligent? Measuring Intellectual Bandwidth for Value Creation
Sajda Qureshi, Andries van der Vaart, Gijs Kaulingfreeks, Gert-Jan de Vreede, Robert O. Briggs & J. Nunamaker
ERS-2001-54-LIS
Pattern-based Target Selection applied to Fund Raising
Wim Pijls, Rob Potharst & Uzay Kaymak
ERS-2001-56-LIS
A Decision Support System for Crew Planning in Passenger Transportation using a Flexible Branch-and-Price
Algorithm
Richard Freling, Ramon M. Lentink & Albert P.M. Wagelmans
ERS-2001-57-LIS
One and Two Way Packaging in the Dairy Sector
Jacqueline Bloemhof, Jo van Nunen, Jurriaan Vroom, Ad van der Linden & Annemarie Kraal
ERS-2001-58-LIS
Design principles for closed loop supply chains: optimizing economic, logistic and environmental performance
Harold Krikke, Costas P. Pappis, Giannis T. Tsoulfas & Jacqueline Bloemhof-Ruwaard
ERS-2001-62-LIS
Dynamic scheduling of handling equipment at automated container terminals
Patrick J.M. Meersmans & Albert P.M. Wagelmans
ERS-2001-69-LIS
Web Auctions in Europe: A detailed analysis of five business-to-consumer auctions
Athanasia Pouloudi, Jochem Paarlberg & Eric van Heck
ERS-2001-76-LIS
ii
29. Models and Techniques for Hotel Revenue. Management using a Roling Horizon.
Paul Goldman, Richard Freling, Kevin Pak & Nanda Piersma
ERS-2001-80-LIS
2000
A Greedy Heuristic for a Three-Level Multi-Period Single-Sourcing Problem
H. Edwin Romeijn & Dolores Romero Morales
ERS-2000-04-LIS
Integer Constraints for Train Series Connections
Rob A. Zuidwijk & Leo G. Kroon
ERS-2000-05-LIS
Competitive Exception Learning Using Fuzzy Frequency Distribution
W-M. van den Bergh & J. van den Berg
ERS-2000-06-LIS
Models and Algorithms for Integration of Vehicle and Crew Scheduling
Richard Freling, Dennis Huisman & Albert P.M. Wagelmans
ERS-2000-14-LIS
Managing Knowledge in a Distributed Decision Making Context: The Way Forward for Decision Support Systems
Sajda Qureshi & Vlatka Hlupic
ERS-2000-16-LIS
Adaptiveness in Virtual Teams: Organisational Challenges and Research Direction
Sajda Qureshi & Doug Vogel
ERS-2000-20-LIS
Assessment of Sustainable Development: a Novel Approach using Fuzzy Set Theory
A.M.G. Cornelissen, J. van den Berg, W.J. Koops, M. Grossman & H.M.J. Udo
ERS-2000-23-LIS
Applying an Integrated Approach to Vehicle and Crew Scheduling in Practice
Richard Freling, Dennis Huisman & Albert P.M. Wagelmans
ERS-2000-31-LIS
An NPV and AC analysis of a stochastic inventory system with joint manufacturing and remanufacturing
Erwin van der Laan
ERS-2000-38-LIS
Generalizing Refinement Operators to Learn Prenex Conjunctive Normal Forms
Shan-Hwei Nienhuys-Cheng, Wim Van Laer, Jan Ramon & Luc De Raedt
ERS-2000-39-LIS
Classification and Target Group Selection bases upon Frequent Patterns
Wim Pijls & Rob Potharst
ERS-2000-40-LIS
Average Costs versus Net Present Value: a Comparison for Multi-Source Inventory Models
Erwin van der Laan & Ruud Teunter
ERS-2000-47-LIS
Fuzzy Modeling of Client Preference in Data-Rich Marketing Environments
Magne Setnes & Uzay Kaymak
ERS-2000-49-LIS
iii
30. Extended Fuzzy Clustering Algorithms
Uzay Kaymak & Magne Setnes
ERS-2000-51-LIS
Mining frequent itemsets in memory-resident databases
Wim Pijls & Jan C. Bioch
ERS-2000-53-LIS
Crew Scheduling for Netherlands Railways. “Destination: Curstomer”
Leo Kroon & Matteo Fischetti
ERS-2000-56-LIS
iv