A polyhedral graph theory approach to revenue management in the airline industry

Revenue management is a business principle that balances supply and demand to control price and/or inventory availability in order to maximize revenue and profit growth. Airlines offer a variety of fare products to the marketplace to preserve their regular customers, reduce unsold seats by attracting lower fare customers, and maintain a competitive image. This article develops a new analytical procedure for joint pricing and seat allocation problem considering demand forecasts, number of fare classes, and aircraft capacities. The proposed polyhedral graph theoretical approach utilizes split graphs and cutting planes and achieves significant computer timesavings when compared to a general-purpose integer programming commercial software. Although this article focuses on the airline industry, the proposed approach has a potential utilization in such service and transportation related industries as lodging, car rental, trucking, rail, cargo, broadcasting, housing, cruise lines, manufacturing, entertainment, energy, and health care.