Scheduling and Revenue Management Process Integration: Benefits and Hurdles

1. Scheduling and Revenue Management Process Integration: Benefits and Hurdles Timothy L. Jacobs, Elizabeth Hunt and Matt Korol Operations Research and Decision Support American Airlines May 2001

2. Presentation Overview • Process Integration - What theory tells us. • Practical First Steps and Their Impact • Consistent Scheduling and Revenue Management (O&D FAM). • O&D-based Demand Driven Dispatch (D3) • Benefits and Hurdles to Implementation • Summary OR&DS

3. Long- Term Scheduling Strategic Product Pricing Yield Management Short- Term Tactical Sales and Distribution Customers Airline Business Overview OR&DS

4. Network Scheduling & Planning Informal Feedback Flight Scheduling (Leg-based) Fleeted Schedule (Fixed Capacities) Flight Demand Forecasts Data Source Revenue Management Process & Controls Revenue Management (O&D-based) Capacities / O&D Forecasts O&D Demand Forecasts Data Source 12+ Months 9-6 Months 3 Months 45 Days DOD Time Typical Scheduling and RM Process OR&DS

5. Proposed Integrated Process O&D Network Planning O&D-based Scheduling Near-term Aircraft Assignment (D3 Process) Flight Scheduling Controls/Capacities Revenue Management Process & Controls Revenue Management Forecasts Forecasts O&D Forecasts/Capacities Steady-State Industry Forecast O&D Daily Forecast O&D Time Series Forecast Forecasting Forecast Data and Control Information Data Sources Causal Effect DataDate Specific Data 12+ Months 9-6 Months 3 Months 45 Days DOD Time OR&DS

6. Consistent Scheduling and RM Benefits - O&D Fleet Assignment • Provides a better balance between supply and demand and improves current practice by explicitly considering passenger flows in the scheduling process. • Multiple O&Ds • Multiple Classes • Consistent with Yield Management seat allocation and controls • Extensible to consider network recapture and pricing effects OR&DS

7. Consistent Scheduling and RM Benefits - Theory Integrated Scheduling & Revenue Management Process Revenue Management Only No Revenue Management OR&DS Reference: Jacobs, Ratliff and Smith;1997, 2000

8. Extension to Consider Pricing Effects O&D Fleeting, RM & Pricing O&D Fleeting and RM O&D RM & Pricing O&D RM No RM OR&DS Reference: Jacobs, Ratliff and Smith;1997, 2000

9. Estimate O&D market forecasts. Fleet schedule with a Segment-based Fleet Assignment Model (Leg-FAM). Improve fleeted schedule using O&D FAM application. Evaluate Leg-FAM and O&D FAM schedules using the O&D revenue mix model. O&D Fleeting and RM Benchmark Process - Practice O&D Forecast Leg FAM O&D FAM O&D Evaluation: Revenue Mix OR&DS

10. O&D Fleeting and RM Benchmark • General Information • 4,500 flight legs. • 26 sub-fleets. • 800 aircraft. • 150,000 total O&D markets (Including International Markets). • No Jet-Prop Swaps. • International Fleeting Maintained. OR&DS

11. O&D Fleeting and RM Benchmark Results OR&DS

12. Observations and Conclusions • Benchmark results using existing forecasting methods and a consistent O&D Fleeting and RM approach illustrate significant potential benefits over segment-based FAM. • Additional benchmarks showed annual improvements ranging from 0.54% to 0.77% of revenue. • O&D Fleeting and RM process provides a better balance between available resources (capacity) and the O&D-based demands. • O&D Fleeting produces a schedule fleeting consistent with the RM process used to manage the seat inventory. This provides better opportunities to increase the overall schedule yield. • Potential benefits from a consistent O&D Fleeting and RM process will increase as forecasting capabilities improve. OR&DS

13. O&D-based Demand Driven Dispatch (D3) • Objective: Increase overall profitability by making strategic near-term aircraft swaps between crew compatible equipment. • Driving Forces: • Paradigm shift: Many airlines fleet the schedule using leg-based methods while managing the seat inventory using O&D-based methods. This leads to an inconsistent matching of supply and demand. • Daily forecast variability: D3 exploits opportunities created by the systemic daily variation of ODF demand flowing through the network. These effects are not captured when schedules are built using typical day forecasts. • Forecast Error: D3 improves schedule profitability by using improved forecast data nearer the day of departure. OR&DS

14. Obtain remaining O&D Fare Class (ODF) demand forecasts, firm reservation holds, capacities and itinerary fares from RM for a specific reading day and departure date. Improve fleeted schedule using O&D FAM and allowing only crew compatible RJ swaps. Evaluate resulting schedule using the RM model and forecast data. Demand Driven Dispatch (D3) Process RM Model O&D FAM Evaluation: Revenue Mix OR&DS

15. Demand Driven Dispatch Benchmark • Benchmark Information • Reading Day 13. • Potential swaps: 566 candidate flight legs. • 4800 total flight legs in schedule. • 115,000 total O&D fare classes (Including International Markets) considered in analysis. • All other fleets held constant. OR&DS

16. D3 Benchmark Results - Max Profit Measure* Input Schedule D3 Solution Incremental Profit Gain (% of Revenue) 0.64 114 Switched Flights Segments Flown RJ3 RJ4 230 198 368 336 Utilization 9:37 10:31 RJ3 RJ4 10:02 10:14 * All measures are for a daily schedule OR&DS

17. D3 Parametric Analysis Results - Swap Limit Daily Profit Increase (% of Revenue) Cumulative Percent of Total Swap Limit 25 50 75 100 114 0.25 0.35 0.50 0.60 0.64 39% 56% 78% 94% 100% OR&DS

18. Reservation Holds Incremental Traffic Input Output Total Traffic Input Output Fleet Input Output 7 32 33 RJ4 RJ3 RJ3 RJ3 RJ4 RJ4 7 4 3 8 9 10 14 36 36 15 41 43 A Closer Look - 25 Swap Limit Flight No. Profit Change (% of Rev) 1 2 3 0.01 0.02 0.03 OR&DS

19. D3 Benefits and Timing - What the theory tells us. OR&DS

20. D3 Benefits and Timing - The Practice OR&DS

21. D3 Summary • Results clearly illustrate the potential benefit associated with D3 swaps of crew compatible aircraft near the day of departure. • D3 effectively exploits the daily variations in ODF demand forecasts to identify revenue opportunities not realized during the schedule planning process. • D3 provides an added degree of freedom to the RM process. This added flexibility allows the airline to adapt to better forecasts near the day of departure. • A portion of these benefits are likely due to inconsistencies between the scheduling and RM processes (Leg-based planning vs. O&D-based control). • Must account for M&E, crew and operational issues. OR&DS

22. Benefits and Hurdles to Integration • Benefits: • Consistent scheduling and RM processes can uncover significant revenue opportunities not realized in today’s process. • Implementation facilitates a natural and systematic feedback mechanism between scheduling and RM processes. • Provides opportunities for further process integration (pricing, M&E, Crew). • Hurdles: • Paradigm shift will require analysts to think about the scheduling problem in a much different way. • Process integration raises a host of process and schedule ownership issues that must be resolved. • Integration puts added emphasis on the importance of forecasting at the Leg and O&D level. • Timing of D3 highly dependent on ability to market added capacity. OR&DS