Revenue sharing in airline alliances (Original Version and Presentation)

Abstract

Airline alliances as means of collaboration among independent carriers are a growing trend in the industry. Different from traditional, monopolistic airline revenue management, alliance members control a decentralized network of resources through independent reservation and information systems. Two of the most significant features of the alliances are codeshare and interline itineraries by which independent airlines can collaboratively market and operate flights. To study the revenue management problem of such decentralized network environment, we follow a two-stage hierarchical approach. In the first stage, airlines agree on how to share the revenue generated by these codeshare and interline products by setting fixed proration rates. In the second stage, airlines operate independent inventory control systems in order to maximize their own expected revenues. Through both analytical and numerical studies, we find that the choice of the revenue sharing rule has a great impact on the performance of the alliance members. In particular, in the case where each airline uses partitioned booking limits, there exists a revenue sharing rule which is admissible in the sense that no airline coalition has incentive to break off from the grand alliance, and is efficient in the sense that the decentralized system can achieve the maximum revenues obtained by a central planner managing the global network. The partitioned booking limits are chosen for the tractability of the analysis, but our numerical comparisons relative to dynamic control policies used in practice (e.g., bid prices and displacement adjusted virtual nesting) confirm the quality of the approximation. Yet, given that the revenue sharing rule that is provably optimal in our model requires the disclosure of private demand information, we propose a simple alternative rule that is based on public fares. This heuristic performs noticeably well even under the dynamic control policies, becoming an interesting candidate to be pursued in practice. Copyright © (2011) by AGIFORS.