ISYE 645: ENGINEERING MODELS FOR SUPPLY CHAINS - FALL 2017

Review Report Assignment – Due Date: Dec 12th, 2017

Smith et al: Yield Management at American Airlines, Interfaces 22 (1) pp 8-31, 1992
Name: Bhaskar Puggal Student ID: 9078050680
1. How does overbooking impact over sale cost and net revenues at American Airlines (AA)? How did AA
estimate the optimum overbooking level?
The over sale cost increases with higher overbooking levels. As overbooking level increases, the net
revenue increases to a maximum and then decreases as the incremental cost of an additional over sale cost
exceeds the value of an additional reservation. Optimal overbooking level occurs at the maximum of the
net revenue curve, where net revenue is the difference between total passenger revenue and over sale
cost. The marginal revenue gained from allowing an additional reservation equals the marginal cost of an
additional over sale.

2. What is the concept of nesting and how was it used for discount seat allocation by AA?
Availability for each discount class is controlled through process called Nesting, which makes subsets of the
seats available to various levels of discount fares. Simplifying the maintenance of discount fares by
automatically ensuring that a low-value seat is never available when a higher-valued fare is closed to
additional sales. AA uses Marginal Revenue approach for discount allocation method accounting multiple
fare types, customer sell up behavior, timing for future demand. Method is not optimal but heuristic and
solutions are near optimal.

3. What role did deregulation have in creating the traffic management problem at AA? How did virtual nesting
help AA address this problem?
Deregulation increased traffic management problem drastically. Because airlines were allowed more
flexibility in scheduling. In 1980 approximately 10% of AA’s traffic consisted of connecting passengers but
by mid-1980’s this figure had risen to 66%. AA used Virtual nesting to reduce the inventory controls. By
creating clusters/buckets it controlled availability for market/fare-class combinations on each flight. All the
buckets are clustered into eight buckets on each flight. The buckets are nested so that as sales increases,
availability is restricted first to low value reservations, regardless of market/fare class. AA try to minimize
the variability within buckets and maximize the variability between buckets.

4. How did AA evaluate the impact of schedule and fare changes on passenger demand?
Passenger-choice model was developed to evaluate the impact of fare and schedule changes on customer
demand. This model estimates a passenger utility function using departure time, service type, time
between departures & arrivals, airlines, price and restrictions. Utility function is estimated for each
possible option offered to a potential customer and is used in conjunction with a logit-choice model to
estimate customer preference and market share. AA’s long-term plan is to use passenger-choice modelling
to forecast demand and cancellations in response to price and sales dynamics.

5. How did AA estimate the total revenue opportunity from overbooking?

The total revenue opportunity from overbooking is the difference between the “perfect overbooking
controls” net revenue and the “no overbooking controls” net revenue. AA estimated the “no control” net
revenue by evaluating the reservation process. It does not count any reservations above capacity. AA
estimated the “perfect control” net revenue by eliminating all over sales and spoilages.

6. What did you like most (least) about this paper?

 ISYE 645: ENGINEERING MODELS FOR SUPPLY CHAINS - FALL 2017
Review Report Assignment – Due Date: Dec 12th, 2017
Smith et al: Yield Management at American Airlines, Interfaces 22 (1) pp 8-31, 1992
Name: Bhaskar Puggal Student ID: 9078050680
I like the way Mathematical models were developed regarding the passenger choice model and total
revenue opportunity.