White Papers

4 Breaking Down Willingness-to-Pay in RM www.pros.com In some cases, the analyst may also employ a load factor rule that will close the lower classes as the load factor increases. Airlines may also combine these approaches as well. This approach has proven valuable at airlines, particularly those that take a method-driven approach to creating the rules. However, the application of these rules can often be too broadly or improperly defined, causing close-off of too much or too little. Further, this approach can also impact the network effect by overriding the result of the network optimization. And, because of the significant manual effort this approach requires, airlines leave themselves open to errors in inputs or missed opportunities. Another approach airlines may employ is a methodology that increases the demand in the higher classes, closer to departure. This gives the traditional optimization the impression that higher-paying demand exists closer to departure, potentially setting controls at a higher availability level. The assumption with this approach is that there is enough demand for those classes willing to pay that fare. However, this approach still relies only on the bid price to force the buy-up, which is not the intended use for it. If a flight does not have enough demand to fill the plane, the bid price is likely to be quite low, indicating that any fare is sellable. In this case, there is potentially still revenue opportunity by forcing demand to buy into the higher classes, which won't be accomplished using just the bid price. The ideal revenue management methodology for handling this business environment consists of forecasting and optimization under the consideration of this buy-down scenario occurring. The first step is to forecast the price sensitivity based on the passenger's willingness-to-pay. The second step is to use this price- sensitive forecast to apply a marginal revenue optimization to account for that willingness-to-pay. Once that optimization is complete, the network optimization can follow, along with the dynamic program to calculate network optimal bid prices. After the revenue management processes are complete, the availability calculator receives this transformed fare as well as the bid prices, which are used to calculate availability. The PROS RM Advantage solution, Willingness-to-Pay (WTP) Forecasting and Optimization, along with PROS Real- Time Dynamic Pricing (PROS RTDP), have these steps fully integrated in the solution (figure 1). The remainder of this paper will be a deep dive into the PROS recommended approach to forecasting and optimization with WTP methodology. FIGURE 1 Outline of the key steps in the process along with PROS approach to solving those steps. Forecast elastic demand Perform transformation on the daily fare to account to elasticity Generate bid prices with the transformed demand and fares Calculate availability using the transformed fares and bid prices PROS Bayesian Forecaster PROS Concave Envelope Data Transformation (CEDT) PROS Optimization (LP, DP) PROS RTDP

• Cover