OR&DS

Timothy L. Jacobs, Elizabeth Hunt and Matt KorolOperations Research and Decision Support

American Airlines

May 2001

Scheduling and Revenue Management Process Scheduling and Revenue Management Process Integration: Benefits and HurdlesIntegration: Benefits and Hurdles

OR&DS 2

Presentation OverviewPresentation 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

SchedulingScheduling

Product PricingProduct Pricing

Yield ManagementYield Management

Sales and DistributionSales and Distribution

Long-Long-TermTerm

Short-Short-TermTerm

StrategicStrategic

TacticalTactical

CustomersCustomers

Airline Business OverviewAirline Business Overview

OR&DS 4

Typical Scheduling and RM ProcessTypical Scheduling and RM Process

FlightScheduling(Leg-based)

RevenueManagement(O&D-based)

Time12+ Months 9-6 Months DOD3 Months 45 Days

O&D Demand Forecasts

Revenue Management Process & Controls

Capacities / O&D Forecasts

Network Scheduling& Planning

Flight Demand Forecasts

Fleeted Schedule(Fixed Capacities)

Data Source

Data Source

Informal Feedback

OR&DS 5

Proposed Integrated ProcessProposed Integrated Process

Causal Effect Data Date Specific Data

Steady-State IndustryForecast

O&D Daily Forecast

O&D Time Series Forecast

Revenue Management Process & Controls

O&D NetworkPlanning

O&D-basedScheduling

Near-term Aircraft Assignment(D3 Process)

FlightScheduling

RevenueManagement

Forecasting

DataSources

Time12+ Months 9-6 Months DOD3 Months 45 Days

Fo

rec

as

ts

Fo

rec

as

ts

Controls/Capacities

O&D Forecasts/Capacities

Forecast Data and Control Information

OR&DS 6

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

Consistent Scheduling and RM Benefits - O&D Fleet Assignment Consistent Scheduling and RM Benefits - O&D Fleet Assignment

OR&DS 7

Consistent Scheduling and RM Benefits - TheoryConsistent Scheduling and RM Benefits - Theory

0

2

4

6

8

10

12

14

16

18

60 65 70 75 80

Load Factor (%)

Rev

enu

e C

on

trib

utio

n (%

)

Integrated Scheduling & Revenue Management

Process

No Revenue Management

Revenue Management Only

Reference: Jacobs, Ratliff and Smith;1997, 2000

OR&DS 8

0

2

4

6

8

10

12

14

16

18

20

60 62 64 66 68 70 72 74 76 78 80

Load Factor (%)

Reven

ue C

on

trib

uti

on

(%

)

No RM

O&D RM

O&D RM & Pricing

O&D Fleeting and RM

O&D Fleeting, RM & Pricing

Extension to Consider Pricing Effects Extension to Consider Pricing Effects

Reference: Jacobs, Ratliff and Smith;1997, 2000

OR&DS 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 Fleeting and RM Benchmark Process - Practice

O&DForecast

LegFAM

O&D FAM

O&D Evaluation: Revenue Mix

OR&DS 10

O&D Fleeting and RM BenchmarkO&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 ResultsO&D Fleeting and RM Benchmark Results

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Winter Summer Annual

IATA Schedule Season

Sc

he

du

le Im

pro

ve

me

nt

(% o

f re

ve

nu

e)

Leg-FAM

O&D FAM

0.33 % Improvement

0.46 %Improvement

0.41 % Improvement

OR&DS 12

Observations and ConclusionsObservations 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

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.

O&D-based Demand Driven Dispatch (D3)O&D-based Demand Driven Dispatch (D3)

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) ProcessDemand Driven Dispatch (D3) Process

RM Model

O&D FAM

Evaluation: Revenue Mix

OR&DS 15

Demand Driven Dispatch BenchmarkDemand 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 ProfitD3 Benchmark Results - Max Profit

Measure* Input Schedule D3 Solution

Incremental Profit Gain (% of Revenue)

0.64

Switched Flights

Segments Flown

114

RJ3RJ4

230

* All measures are for a daily schedule

10:31 9:37Utilization

RJ3RJ4

336198368

10:02 10:14

OR&DS 17

SwapLimit

Daily Profit Increase (% of Revenue)

Cumulative Percent of Total

25

50

75

100

114

0.25

0.35

0.50

0.60

0.64

39%

56%

78%

94%

100%

D3 Parametric Analysis Results - Swap LimitD3 Parametric Analysis Results - Swap Limit

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A Closer Look - 25 Swap LimitA Closer Look - 25 Swap Limit

Flight No.

1

2

3

Reservation Holds

7

32

33

Incremental TrafficInput Output

7

4

3

8

9

10

Fleet Input Output

RJ4

RJ3

RJ3

RJ3

RJ4

RJ4

Total TrafficInput Output

14

36

36

15

41

43

Profit Change (% of Rev)

0.01

0.02

0.03

OR&DS 19

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

0 50 100 150 200

Reading Day

Inc

ree

nta

l P

rofi

t (%

of

Re

ve

nu

e)

Gains from Inconsistent Scheduling

and RM Processes

Systemic Daily Variability

Forecast Error

Gains due to Improved Booking and

Forecast Information

Operationally Feasible D3 Zone

Steady-StateForecast ZoneOperationally Infeasible Zone

D3 Benefits and Timing - What the theory tells us.D3 Benefits and Timing - What the theory tells us.

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D3 Benefits and Timing - The PracticeD3 Benefits and Timing - The Practice

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0 20 40 60 80 100 120

Reading Day

Inc

rem

en

tal P

rofi

t (%

of

Re

ve

nu

e)

Incremental Profit

from D3 aloneon RRD 13

Incremental Profit likely due to Differences in the Scheduling

Approach and D3 process on RRD 118 due to daily variations

and forecast error

Likely trend without Schedule Changes between RRD 97

and RRD 69

RRD 69 included a number of schedule changesnot present

in RRD 97 and 118

OR&DS 21

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.

D3 SummaryD3 Summary

OR&DS 22

Benefits and Hurdles to Integration 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.