A new approach to O&D revenue management based on scenario trees

Origin and destination (O&D) revenue management (RM), either leg–based or PNR based, has become a standard in the airline industry. This paper presents a new approach to O&D RM which does not make any assumptions on demand distributions or on the correlations of the booking process. Protection levels are determined for all origin–destination itineraries, fare classes, points of sale and data collection points (DCPs), and for a variety of demand patterns over the complete booking period. This approach to the seat inventory problem is modelled as a multistage stochastic program, where its stages correspond to the DCPs of the booking horizon. The stochastic passenger demand process is approximated by a scenario tree generated from historical data by a recursive scenario reduction procedure. The stochastic program represents a specially structured large scale linear program (LP) that may be solved by standard LP software (eg CPLEX). Preliminary numerical experience is reported.