Understanding the relationship between price, revenue management controls and scheduled capacity – A price balance statistic for optimizing pricing strategies

The relationship among pricing, revenue management (RM) controls and capacity directly impacts the profitability potential of an airline's schedule. Too much capacity in a market leads to wide open RM controls with deeply discounted prices to stimulate demand to fill the available seats at unprofitable yields. On the other hand, a schedule that does not supply enough capacity can lead to higher prices and stringent controls that invite competition. Understanding the relationship between the scheduled capacity, pricing structure and RM controls gives an airline the opportunity to better align scheduled capacity, adjust pricing structures and manage the seat inventory to maximize profitability. This article provides a practical approach to understanding the impact of scheduled capacity and pricing structures on overall network revenue. A macro-level metric known as the ‘price balance statistic’ is described for evaluating the quality of a given pricing strategy and guiding a search algorithm to identify an optimal alignment between pricing structure, scheduled capacity and RM controls using marginal revenue principles.