Airline Revenue Management Games With Government Mandate

In 2007, the Civil Aviation Administration of China (CAAC) asked the five airlines with service between Shanghai and Beijing to form an express shuttle al-liance called "Beijing-Shanghai Express". To reduce waiting and traveling time of passengers, the five airlines share channels of security checks, waiting area, check-in counters and gates for all flights between Shanghai and Beijing; further-more, on the departure day, passengers who have originally purchased tickets from one airline could freely switch to any other airline at any time. If a pas-senger switches from one airline to another, a transfer fee will be paid for by the original airline to the receiving airline, and the amount of the fee was first set at 80% of the full fare price. It seemed that this mechanism should work well since it would provide great convenience for travelers. However, immediately after its implementation on August 6,2007, airfares for flights between Shanghai and Bei-jing shot up significantly, and the situation continues until an intervention was made by CAAC. Why did airfares go up? How does the government mandate impact airline operations? How the government mandate should be designed so that the market could operate as efficiently as possible? This thesis studies rev-enue management games in a duopoly airline market with government mandate, and tries to answer these questions from the perspective of game theory. The main contributions of this thesis are as follows:1. It studies a seat inventory competition game between duopoly airlines with government mandate. In this study, it is assumes that airfares are given a priori, and airlines decide how to allocate seat inventory. This study focuses on analyzing the impact of government mandate on seat inventory competition between airlines without effects of airfares. Results show that with the govern-ment mandate the airlines would provide less low-fare seats which would increase the average airfares and their total revenue would be less as well. In addition, sensitivity analysis implies that, a lower transfer fee could lead to more low-fare seats offered, resulting in higher total revenues.2. It studies a price competition game between duopoly airlines with govern-ment mandate. In this study, it is assumes that the allocation of seat inventory is given a priori and airlines decide how to price the air tickets (low-fare tickets and high-fare tickets). This study focuses on analyzing the impact of government mandate on price competition between airlines without effects of seat inventory allocations. Results show that with the government mandate the airlines would raise the airfares, and their total revenue would be increased under mild condi-tions. In addition, sensitivity analysis implies that a lower transfer fee could lead to lower airfares and total revenues. Finally, numerical results show that with the government mandate, airfares and airlines’total revenue would be increased in almost all test scenarios with only a few exceptions and it can be observed in these few exceptions the transfer fee is usually relatively low and high fares are also relatively low (in comparison with low fares).3. It studies a price and seat inventory competition game between duopoly airlines with government mandate. To simplify the problem, it is assumes that demands for the low-fare seats are sufficient large and the low fare price is given a priori, so that low-fare seats always sell out. In this model, airlines decide how to allocate seat inventory and price the high-fare tickets. Results show that with the government mandate the airlines would provide more high-fare seats and raise high fare prices as well; furthermore, less low-fare seats offered would decrease airlines’revenue, and higher high fare price would increase airlines’revenue. In addition, sensitivity analysis implies:(1) higher low fare price could lead to less high-fare seats protected; (2) higher transfer fee or market share of deterministic demands for the high-fare seats could lead to more high-fare seats protected and higher high fare prices; (3) higher price elasticity of demand could lead to less high-fare seats protected and lower high fare prices. Finally, numerical results show that, comparing with airfares and revenues, the government mandate has greater influence on seat allocations.To improve the efficiency of airline markets and social welfare, some sug-gestions are proposed as follows:(1) the government could set a lower transfer fee to encourage airlines to offer more low-fare seats; (2) the government could also set a lower full fare price to promote lower airfares; (3) the proportion of flights allocated to different time slots for each airline should be about the same, otherwise, it might create an unfair and inefficient market.This thesis provides a game-theoretic approach for the research on airline competition with government mandate, and its conclusions and suggestions are beneficial for both airlines and the civil aviation authority, so the research findings of this thesis have both theoretical and applicable values.