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

OR&DS 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 (D 3 ) Benefits and Hurdles to Implementation Summary

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

OR&DS 4 Typical Scheduling and RM Process Flight Scheduling (Leg-based) Revenue Management (O&D-based) Time 12 + Months9-6 MonthsDOD3 Months45 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 Informal Feedback

OR&DS 5 Proposed Integrated Process Causal Effect Data Date Specific Data Steady-State Industry Forecast O&D Daily Forecast O&D Time Series Forecast Revenue Management Process & Controls O&D Network Planning O&D-based Scheduling Near-term Aircraft Assignment (D 3 Process) Flight Scheduling Revenue Management Forecasting Data Sources Time 12 + Months9-6 MonthsDOD3 Months45 Days Forecasts 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

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

OR&DS 8 No RM O&D RM O&D RM & Pricing O&D Fleeting and RM O&D Fleeting, RM & Pricing 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 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 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: D 3 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: D 3 improves schedule profitability by using improved forecast data nearer the day of departure. O&D-based Demand Driven Dispatch (D 3 )

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 (D 3 ) 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 D 3 Benchmark Results - Max Profit Measure* Input ScheduleD 3 Solution Incremental Profit Gain (% of Revenue) 0.64 Switched Flights Segments Flown 114 RJ3 RJ4 230 * All measures are for a daily schedule 10:31 9:37 Utilization RJ3 RJ :02 10:14

OR&DS 17 Swap Limit Daily Profit Increase (% of Revenue) Cumulative Percent of Total % 56% 78% 94% 100% D 3 Parametric Analysis Results - Swap Limit

OR&DS 18 A Closer Look - 25 Swap Limit Flight No Reservation Holds Incremental Traffic Input Output Fleet Input Output RJ4 RJ3 RJ4 Total Traffic Input Output Profit Change (% of Rev)

OR&DS 19 D 3 Benefits and Timing - What the theory tells us.

OR&DS 20 D 3 Benefits and Timing - The Practice

OR&DS 21 Results clearly illustrate the potential benefit associated with D 3 swaps of crew compatible aircraft near the day of departure. D 3 effectively exploits the daily variations in ODF demand forecasts to identify revenue opportunities not realized during the schedule planning process. D 3 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. D 3 Summary

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 D 3 highly dependent on ability to market added capacity.