Improving Revenue by System Integration and Cooperative Optimization Reservations & Yield Management Study Group Annual Meeting Berlin April 2002 UNIVERSITY of PADERBORN Georg Kliewer Sven Grothklags Klaus Weber

Slide 2 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Motivation - Planning Processes Fleet Assignment Aircraft Rotation Crew Pairing Crew Rostering Operation Control Network Design Market Modeling Revenue Management

Slide 3 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Agenda Business Process Mathematical Model Optimisation Algorithm Fleet Assignment Problem O&D Revenue Management Current System Integration System Integration Approaches Conclusions

Slide 4 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Fleet Assignment - Business Process Find most Profitable Subfleet Assignment Use a Subfleet that is Feasible for each Leg Use the Existing Fleet and no extra Aircraft Obey Blocktime and Groundtime Constraints Scheduling Activity NetLine Application Fleet Assignment weeklyfully-dated NetLine/Plan NetLine/Sched NetLine/Ops Operations Control Development

Slide 5 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Fleet Assignment - Business Process (cont)

Slide 6 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Strategic Profitability Evaluation Model Strategic-PEM is a forecasting model that measures the network profitability contribution of each schedule scenario The Strategic PEM forecasts are developed on an O&D basis for a representative week for a schedule period Input Data: average revenue for the O&Ds market demand for the O&Ds cost model fleeted schedule Output Data: overall schedule profitability profit information for each leg-subfleet combination

Slide 7 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Strategic Profitability Evaluation Model (cont) Fleet AssignmentProfitability Evaluation Model objective function for fleet assignment assignment Simulated Annealing Market Share Model Connection Builder Spill & Recapture Revenue & Cost Estimation constrained passenger flow prelim. capacity assignment schedule av. revenues market demand itineraries unconstrained demand

Slide 8 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Fleet Assignment - Mathematical Model PAD MUC FRA ground arc ( v-,v ) x l,f y v,v+ v v+ v- flight event leg l x l,f =1  leg l is assigned to subfleet f y v,v+ : aircraft flow on the ground

Slide 9 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Fleet Assignment - Optimisation Algorithm Fleet Assignment fleet schedule restrictions Accept/Reject Generate Neighbor Solution Update Solution final assignment Simulated Annealing Objective Function Profitability Evaluation Model

Slide 10 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Fleet Assignment - Optimisation Algorithm S = initial solution T = warming_up do S new = neighbor solution (S)  cost = cost(S new ) - cost(S) if (  cost < 0 or accept(  cost,T) ) S = S new until equilibrium T = update(T) until frozen Heuristic solution method based on local search 1 Frozen P Equilibrium

Slide 11 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Fleet Assignment - Results AlgorithmHill-ClimberSimulated Annealing Mixed- Integer Program  -solution quality 98,5%99,7%>99,9%

Slide 12 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Agenda Business Process System Overview O&D Control Parameters Fleet Assignment Problem O&D Revenue Management Current System Integration System Integration Approaches Conclusions

Slide 13 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 O&D Revenue Management – Business Process Application NetLine/Plan NetLine/Sched NetLine/Ops NetLine/Price ProfitLine Business Activities Operations Control Pricing Revenue Management Development

Slide 14 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 O&D Revenue Management – System Overview O&D Forecast Engine O&D Optimiser Forecast Interface DB Optimiser Interface DB Inventory GDS... Forecast Building Demand Forecasts Control Parameters Forecasts based on either booking histories or market model and price elasticity model or both  e.g. ODIF POS booking limits  e.g. fare buckets

Slide 15 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 O&D Revenue Management – O&D Control Parameters EMSR varieties booking class limits per leg / compartment on various granularity levels, e.g. ODIF POS bid prices derived from EMSR curve or approximation fare bucket limits per leg / compartment revenue bucket limits per leg / compartment Dynamic programming bid prices per leg / compartment booking class limits derived from bid prices Parameters to be used by fleet assignment process Reflect demand demand variability estimated fares   O&D control parameters depend on type of optimizer

Slide 16 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Agenda Cooperative Approach Fleet Assignment Problem O&D Revenue Management Current System Integration System Integration Approaches Conclusions

Slide 17 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Current System Integration - Cooperative Approach Profitability Evaluation Model Market Share Model Connection Builder Spill & Recapture Revenue & Cost Estimation constrained passenger flow capacity assignment itineraries unconstrained demand Fleet Assignment Accept/Reject Fleet Change on a Leg Sequence Update Solution Simulated Annealing Final Assignment Objective Function 4 5 6

Slide 18 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Current System Integration - Cooperative Approach (cont) Strategic PEM + Fleet AssignmentNetLine/Plan Tactical PEM + Fleet AssignmentNetLine/Sched fully-dated schedule Basic O&D Fleet Assignment Approximative revenue estimation Fast evaluation loop: essential for Simulated Annealing  even faster with internal feedback by passenger flow model State

Slide 19 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Agenda Internal Feedback External Feedback by O&D Revenue Management System System View Fleet Assignment Problem O&D Revenue Management Current System Integration System Integration Approaches Conclusions

Slide 20 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 System Integration – Internal Feedback Fleet Assignment Profitability Evaluation Model Accept/Reject Passenger Flow LP-Model Dual Variables for Legs Fleet Change on a Leg Sequence Update Solution Final Assignment Simulated Annealing Market Share Model Connection Builder Spill & Recapture Revenue & Cost Estimation passenger flow capacity assignment itineraries unconstrained demand Objective Function 4 5

Slide 21 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Profitability Evaluation Model System Integration – External Feedback by O&D RMS Fleet Assignment Accept/Reject Fleet Change on a Leg Sequence Update Solution Simulated Annealing Final Assignment O&D Revenue Management O&D Forecast Engine O&D Optimiser O&D Forecasts O&D Control Parameters Revenue Estimation Objective Function Capacity Assignment Market Share Model Connection Builder Spill & Recapture Cost Estimation passenger flow capacity assignment itineraries unconstrained demand

Slide 22 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 System Integration – System Details Iterative Proration (ProBP) O&D Revenue Management O&D Forecast Engine O&D Optimiser O&D Forecasts Capacity Assignment ODIF POS buckets O&D Control Parameters

Slide 23 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 System Integration – System Details (cont) O&D Revenue Management O&D Forecast Engine O&D Optimiser O&D Forecasts O&D Control Parameters Revenue Estimation Capacity Assignment Estimated revenue = sum of EMSR values

Slide 24 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 System Integration – System Details (cont) O&D Revenue Management O&D Forecast Engine O&D Optimiser O&D Forecasts Capacity Assignment O&D Control Parameters Dynamic Bid Price (DynBP) models revenue management as multistage decision process Bid price matrix per compartment time to departure vacant seats R t-1 (x) = max[f i + R t (x-1), R t (x)] = max [uf i + R t (x-u)] u  {0, 1} R t-1 (x) = R t (x) t t-1 x x-1 R t-1 (x) = f i + R t (x-1)

Slide 25 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 System Integration – System Details (cont) C Increase current optimization point Decrease remaining capacity next optimization point C-1 C-2 tt-1t-2 time to deptarture Bid price matrix per compartment O&D Revenue Management O&D Forecast Engine O&D Optimiser O&D Forecasts O&D Control Parameters Revenue Estimation Capacity Assignment Estimated revenue = sum of bid prices

Slide 26 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 System Integration – Discussion two loop system revenue estimation loop fleet assignment loop significant runtime differences  coordination of loops capacity dependency of revenue management optimization  runtime! Approximation? partly overlapping system functions (market model, OD-Forecast)  redundancy, requires further integration forecast uncertainty and actual fares taken into account simple interfaces between fleet assigner and revenue management system more accurate revenue estimation  StateChallenges

Slide 27 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 O&D Revenue Management System Current System Integration Fleet Assignment Problem Agenda System Integration Approaches Conclusions

Slide 28 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 applied in Fleet Assignment Systems of... Conclusions - Fleet Assignment in Practice Simulated Annealing-based Fleet Assignment Optimization substantial part of commercial Fleet Assignment tool Cooperative Approach Integrated Approaches prototype

Slide 29 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Conclusions - Summary Integration of Fleet Assignment and Revenue Management can improve overall revenue Facets of the fleet assignment problem introduced: business, mathematics, simulated annealing Substantial part: Profitability Evaluation Model (PEM) Revenue management system introduced: particularly important for integration: control parameters Current state of integration: Cooperative Approach with PEM (without integration of RMS) - successfully used by three airlines System integration prototype: based on internal passenger flow model (deterministic LP) based on external link to O&D RMS: EMSR-based, dynamic programming good better almost perfect

Slide 30 Grothklags, Kliewer, Weber: Improving Revenue by System Integration and Co-operative Optimization AGIFORS Reservations & Yield Management Study Group Annual Meeting 2002 Conclusions - Ongoing Work, Outlook Ongoing tests of system integration prototype Market Model used in FA is also used in Pricing  further Integration possible Integration of the Passenger Flow Model in Fleet Assignment  optimization approach for enhanced O&D Fleet Assignment Usage in short-term → pre-implementation phase:  booking dependent (demand driven) fleet assignment

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