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O.R. Inside Your Low Cost Airline

Inside Your Airline

We're all aware of the huge growth of low cost airlines in recent years and it's no exaggeration to say that without O.R. inside, such airlines would not exist.

You may wonder how the low cost carriers manage to offer such surprisingly low fares. One thing, of course, is that by keeping their overheads down and cutting out frills like 'free' meals, they are able to run much leaner operations than the longer established airlines. But even so, the low cost carriers still can't afford to sell every seat at the headline prices - £9.99, £15 and so on - that you see advertised, or they would never recoup the cost of the flight.

There's another challenge that confronts every airline. Seats on any flight are perishable - once the plane has taken off, there is no possibility of selling any empty seats (the same applies to theatre tickets, hotel rooms, package holidays and seats on trains, for example). This being so, it pays an airline to fill a seat, even at a very low fare, rather than have it take off empty. But, as we've said, it simply isn't viable to sell every seat at a low price, so a mechanism has to be found for selling seats at different prices.

Fortunately for the airlines, there are different markets - some passengers want the lowest price and to get it are prepared to book well in advance, travel off peak and commit to using a specific flight; others want the flexibility to book at the last minute, and perhaps to switch flights, and are prepared to pay more - often as much as ten times more - for the convenience. So the skill is to offer a range of fares - very low fares to catch the headlines, pretty low fares for those on a tight budget, through to much higher fares for those prepared to pay for flexibility and convenience.

The real skill comes in working out how many tickets to sell at each fare. Ideally, on any flight, the airline would first like to see how many people are willing to pay the highest price, sell as many tickets as possible to them, then sell as many as possible at the next highest price, and so on, filling up any remaining seats at the cheapest price. Unfortunately they can't do it that way because, as we have seen, the kind of people who are willing to pay the higher fares often want to book at the last minute. So the airline has to do it the other way round, selling the cheapest tickets first and holding back some places at the higher prices. The difficulty with that is knowing how many seats to hold back, given that the number of bookings for any flight varies from day to day.

This is where the airline needs O.R. inside. By observing the day to day variations in the number of high priced tickets sold, the number of seats that need to be reserved to give high fare passengers the best chance of being able to get on the flight, even if they book at the last minute, can be estimated. But if all of those seats were always held until the last minute, then more often than not some of them would be left unsold. So the profile of bookings - how bookings come in over time - is monitored on a continuous basis, compared with the typical profile for the flight, and the number of seats held back is adjusted according to whether bookings are heavier or lighter than the typical profile. To do all this accurately and in such a way as to produce the best achievable results is difficult, and calls for some sophisticated analysis, which the O.R. inside provides.

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