Assessing the Impact: Does an Improvement to a Revenue Management System Lead to an Improved Revenue?

TL;DR

This paper introduces a novel econometric approach to estimate the impact of revenue management system improvements on airline revenue, using counterfactual prediction models applied to real data from Air Canada.

Contribution

It applies econometric methods from macroeconomics to quantify revenue impacts of system changes, a novel approach in revenue management literature.

Findings

Deep neural network model achieves 1% error in counterfactual revenue prediction.

Econometric models achieve 1.1% error, enabling accurate small impact estimation.

The approach effectively estimates impacts around 2% using real airline data.

Abstract

Airlines and other industries have been making use of sophisticated Revenue Management Systems to maximize revenue for decades. While improving the different components of these systems has been the focus of numerous studies, estimating the impact of such improvements on the revenue has been overlooked in the literature despite its practical importance. Indeed, quantifying the benefit of a change in a system serves as support for investment decisions. This is a challenging problem as it corresponds to the difference between the generated value and the value that would have been generated keeping the system as before. The latter is not observable. Moreover, the expected impact can be small in relative value. In this paper, we cast the problem as counterfactual prediction of unobserved revenue. The impact on revenue is then the difference between the observed and the estimated revenue. The originality of this work lies in the innovative application of econometric methods proposed for macroeconomic applications to a new problem setting. Broadly applicable, the approach benefits from only requiring revenue data observed for origin-destination pairs in the network of the airline at each day, before and after a change in the system is applied. We report results using real large-scale data from Air Canada. We compare a deep neural network counterfactual predictions model with econometric models. They achieve respectively 1% and 1.1% of error on the counterfactual revenue predictions, and allow to accurately estimate small impacts (in the order of 2%).