Alliance revenue management in practice: Impacts of bid price sharing and dynamic valuation

The control of shared seat inventory on codeshare flights operated by partner airlines in an alliance produces complexities for revenue management (RM). Typically, the carriers have limited information about their partner’s codeshare flight legs and must make RM seat availability decisions based on the information available with respect to their own network. Such decisions can be sub‐optimal in terms of revenues for the carrier, for the partner, as well as the combined alliance. This article describes the practical RM challenges related to alliance RM and examines information exchange schemes designed to increase revenues for the combined alliance. The sharing of bid prices or network displacement costs between partners allows the carriers to determine seat availability based on the opportunity costs and revenue benefits of accepting codeshare passengers on connecting itineraries involving flights operated by both partners. These partner bid prices can be further used as inputs to the RM optimizer. We call this technique ‘dynamic valuation’ of codeshare paths. We use simulations to demonstrate the revenue benefits of both bid price sharing (BPS) for seat availability and dynamic valuation for RM optimization, when applied in typical network RM methods: displacement adjusted virtual nesting and probabilistic network bid price control. Our simulations suggest that BPS and dynamic valuation can lead to total combined system revenue gains for an alliance partnership of two airlines in the range of 0.30 per cent over other techniques. This can translate into total incremental revenue gains in the range of US$50–$100 million per year for larger airlines in alliance partnerships.