The Passenger-mix Problem in the Scheduled Airlines

Deregulation ha~ opened up many opportunities and challenges in the transportation industry opportunities to increase profits and challenges to keep from being outflanked by competition. A goal of particular interest to the scheduled airlines is to set prices more adaptively and to ~hange them more rapidly. A difficult problem arises when many passengers with different itineraries compete for a limited number of seats on a single-flight segment. The proble 11 is complicated by the existence of different fare classes, many flight segments, and different demands across time . For any given set of prices, flight-segment capacities, and passenger-carrying demand, there is some number of passenge rs at each fare class on each flight segment that will optimize reve nue. Knowledge of such an optimum can be used nN only in pricing analysis but also in setting policies to influence the passenger fare-class mix so that the optimum will be more nearly achieved in actual practice. We describe a method for identifying the optimum fare-class mix and the design of a system for that purpose which we built and implemented for Front ier Airlines. The recognition and formulation of the problem has become even more important as the number of aircraft in the sky has been reduce and the competition for a limited numbe r of seats has become more intense . Prior to deregulation, compl~tltlon among carriers was limited by the Civil Aeronautics Board (CAB) in two of the three major areas of airline marketing route authority and pricing -leaving only the amount of capacity (number of flights ) to be made available by anyone carrier over anyone route up to individual carrier management judgment. Competition, therefore, was limited to frills (fancy meals) and flights (departures every hour) . Pricing policies were generally viewed and analyzed from an industry standpoint because the CAB would not permit any carrier to offer a lower fare that was uneconomic for the industry as a whole . Thus even though a particular fare might benefit a particular carrier at the expense of another carrier, the CAB would not permit the offering of the proposed fare without an extremely strong justification