Revenue Management and Capacity Planning

Broadly defined, revenue management (RM) is the process of maximizing revenue from a fixed amount of perishable inventory using “market segmentation” and “demand management” techniques. While RM is not new (in fact it is as old as commerce, e.g., haggling in a market can be considered a form of RM), the theory and practice of RM have seen significant scientific and practical advances in the last few decades, starting with the Airline Deregulation Act in 1978, which opened the door for RM in the airline industry. It is not surprising that airlines adopted RM, as most of the market characteristics conducive to RM are present. RM is considered an essential function of any airline due to the highly uncertain and competitive marketplace. Consequently, airlines have some of the most sophisticated RM implementations around. As we discuss RM in more detail, we will illustrate concepts using examples (mainly) from the airline industry. We do this because of the importance of the airlines to the development of RM, and because air travel is common enough that most people have experienced airline RM (perhaps unknowingly). In addition, we have some industry background in airline RM. Despite this focus on the airline industry, we note that RM has expanded to many different industries, starting