Transportation

A la carte airfares

Worldwide competition, a steady stream of information via the Internet, and the emergence of a savvy public have led many companies to take another look at their practices in terms of rate-setting and management of supply and demand. Airlines and telecommunications companies now offer a range of flexible and transparent products that enable them to adapt to the needs of a varied and demanding clientele. A team headed by Patrice Marcotte and Gilles Savard, both affiliated with the Centre for Research on Transportation at the Université de Montréal, has developed a series of tools based on the latest projects in operational research, designed to  help companies benefit from business opportunities  made possible by this new economic climate.

 “In this age of electronic trade and increasingly liberalized markets, some trade problems, including setting prices for products, exceed the capacities of human analysis,” Marcotte explains. “The future will belong to computerized decision-making tools based on operational research methods.” Working with major airlines and railroads, Marcotte and Savard’s team developed customized network algorithms based on the carrier’s structural constraint and clients’ propensity for paying for different levels of service.  Many companies are interested in the model developed by the researchers – not only transportation companies but telecommunications corporations as well. A technology transfer company called ExPretio is the brainchild of these joint efforts.

As part of a project with an airline, the researchers are applying an innovative pricing approach that includes a wide range of factors, the most important being clients’ behaviour. “The new generation of software gives managers powerful analytic tools so they can fully benefit from the company’s competitive advantages. For example, we can help them to identify products for which consumers are likely to be willing to pay an extra fee.”

Paradoxically, the best parallel Marcotte can come up with for the deregulated airline marketplace is the North African soukh. “…the kind of market you find in the public squares of Marrakech, where there are no fixed prices. Well aware that a dissatisfied client can buy an equivalent product from a neighbouring stall, the experienced vendor will know how to establish a fair market value for his product. And it works well for merchants and clients alike!”

The main thing is to optimize corporate profits. The margin is a minimal 2% to 3% of revenue, rarely more. Edging revenue up by a few decimal points would cover the cost of developing and implementing computerized tools in short order.  That factor, which often spells the difference between success and failure, is all too frequently forgotten when developing optimization systems. “If you fail to consider how users react, the results can be quite surprising. For example, when you build a rapid road link to cut travel time in a major urban area, it can mean longer transit time for all the users in the network!” Marcotte points out. 

Another example: while raising taxes on cigarettes is a measure designed to improve public health, excessive taxes promote the emergence of a parallel illegal or black market, and cigarette sales may rise while tax revenue falls. “When it comes to pricing, you need to consider many factors. Changing airfares on the Montreal-Toronto route could have an impact on revenue for other flights that include that segment with a transfer in Toronto. So Montreal-Toronto airfares can’t be set independently from prices for other flights.”