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In this lecture, we'll
introduce linear optimization

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and apply it to airline
revenue management.

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Air transportation became a
reality in the United States

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in the 20th century.

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From 1938 to 1978, the
Civil Aeronautics Board

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set fares, routes, and
schedules for all interstate air

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transport.

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Most airlines were very
positive on this system,

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as it guaranteed their profits.

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However, this system led to
higher costs for a traveling

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public as well as to
various inefficiencies.

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For example, applications
for new routes and fares

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were often delayed or dismissed.

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In response to these
inefficiencies,

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the administration
of President Carter

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passed the Airline
Deregulation Act in 1978.

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The act encouraged
more competition.

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As a result, 52
new airlines were

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formed between 1980 and 2000.

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Also, new air routes appeared.

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Correspondingly,
it saved passengers

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an estimated $10.3 billion
each year in travel time.

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Lower fares was another outcome.

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Ticket prices are now 40%
lower than they were in 1978.

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This led to more passengers.

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The number of air passengers
increased from over 200 million

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in 1974 to over 720
million in 2010.

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More competition
led to lower fares,

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as we discussed, while
meeting operating costs.

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This further led to heavy
losses by air carriers.

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Nine major carriers and more
than a hundred smaller airlines

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went bankrupt between
1978 and 2002.

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So it is natural to ask
how did airlines compete?

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In their attempt
to sell more seats,

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airlines started to
offer deep discounts.

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For example, on
January 17, 1985,

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American Airlines launched
its Ultimate Super Saver fares

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to compete with PeopleExpress.

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The key strategy involved
selling enough seats

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to cover fixed operating
costs while selling remaining

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seats at higher rates
to maximize revenues.

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This led to the science
of revenue management

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that we'll study
in this lecture.

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The key question in
revenue management

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is how many seats
to sell on discount.

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The key consideration
is that passengers

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have different valuations.

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For example, business
people value flexibility,

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whereas people seeking a
vacation value good deals.

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So if we sell too
many discounted seats,

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then there would
not be enough seats

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for high-paying passengers.

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At the same time, if we sell
too few discounted seats,

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then we will have empty seats,
which lead to lost revenue.

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So the key question is
how airlines like American

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can allocate their seats
among customers in order

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to maximize their revenue.