A Dynamic Programming Model Incorporating Fare and Ancillary Products with Customer Choice Behavior in Single-Leg Revenue Management

Abstract

Airlines have increased their revenues with ancillary products in recent years while determining the availability of each fare class. In this study, we propose an all-inclusive model when both fare and ancillary products are available called an overall airline model with customer choice behavior for a single flight leg. Our work is motivated by the fare-locking studies and customer choice behavior models in the literature. We make two general research contributions to the literature. First, to our knowledge, a customer choice behavior model in which the subset of fare products is selected in the presence of a fare-locking option over a single flight leg has not been studied previously. Second, we extend the fare-locking model in the literature to consist of the other ancillary products including the ticket change/cancellation without penalty affecting capacity. In this paper, first, we introduce the overall airline model. Next, we formulate a dynamic programming model with customer choice behavior to identify the optimal sets and find the optimal expected revenue. Last, we conduct numerical analyses with the proposed dynamic programming model and standard dynamic programming model. Our results demonstrate that the proposed dynamic model can provide significant revenue benefits compared to the standard model. The percentage gap between the proposed and standard models increases noticeably in the instances of the lower probabilities of purchasing the fare product in the arrival time.