An option-based revenue management procedure for strategic airline alliances

An airline has to decide whether to accept an incoming customer request for a seat in the airplane or to reject it in hope that another customer will request the seat later at a higher price. Capacity control, as one of the instruments of revenue management, gives a solution to this decision problem. In the presence of strategic alliances capacity control changes. For the case of two airlines in the alliance and a single flight leg we propose an option-based capacity control process. The determination of booking limits for capacity control is done with real options. A simulation model is introduced to evaluate the booking process of the partner airlines within the strategic alliance, considering the option-based procedure. In an iterative process the booking limits are improved with simulation-based optimization. The results of the option-based procedure will be compared with the results of the simulation-based optimization, the results of a first-come-first-served (FCFS) approach and ex post optimal solutions.

► Revenue management for strategic alliances is studied. ► An option-based capacity control process is proposed and tested. ► Booking limits are computed by means of simulation-based optimization.