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FINANCIAL APPLICATIONS 179

MANAGEMENT SCIENCE IN ACTION

Revenue Management at National Car Rental
uring its recovery from a near liquidation in the Another model generates length-of-rent catego-
D mid-1990s, National Car Rental developed a ries for each arrival day, which maximizes revenue.
revenue management system that uses linear pro- Pricing models are used to manage revenue by
gramming and other analytical models to help man- segmenting the market between business and lei-
age rental car capacity, pricing and reservations. The sure travel. For example, fares are adjusted to
goal of the revenue management system is to account for the fact that leisure travellers are willing
develop procedures that identify unrealized revenue to commit further in advance than business travellers
opportunities, improve utilization and ultimately and are willing to stay over a weekend.
increase revenue for the company. The implementation of the revenue management
Management science models play a key role in system is credited with returning National Car Rental
revenue management at National. For instance, a to profitability. In the first year of use, revenue man-
linear programming model is used for length-of-rent agement resulted in increased revenues of $56
control. An overbooking model identifies optimal million.
overbooking levels subject to service level con-
Based on M. K. Geraghty and Ernest Johnson, ‘Revenue Management
straints, and a planned upgrade algorithm allows
Saves National Car Rental’, Interfaces 27, no. 1 (January/February
cars in a higher-priced class to be used to satisfy 1997)107–127.
excess demand for cars in a lower-priced class.

advance and are not changeable. Reservations using the full-fare Y class may be
made anytime, with no penalty for changing the reservation at a later date. To
determine the itinerary and fare alternatives that Leisure Air can offer its customers,
we must consider not only the origin and the destination of each flight, but also the
fare class. For instance, possible products include Glasgow to Amsterdam using Q
class, Edinburgh to Salzburg using Q class, Amsterdam to Geneva using Y class and
so on. Each product is referred to as an origin-destination-itinerary fare (ODIF).
Leisure Air established fares and developed forecasts of customer demand for each
of 16 ODIFs, as shown in Table 4.16.
Suppose that a customer calls the Leisure Air reservation office and requests a Q
class seat from Glasgow to Geneva. Should Leisure Air accept the reservation? The
difficulty in making this decision is that even though Leisure Air may have seats
available, the company may not want to accept this reservation at the Q class fare of
E268, especially if it is possible to sell the same reservation later at the Y class fare of
E456. Thus, determining how many Q and Y class seats to make available are impor-
tant decisions that Leisure Air must take in order to operate its reservation system.
To develop a linear programming model that can be used to determine how many
seats Leisure Air should allocate to each fare class we need to define 16 decision
variables, one for each origin-destination-itinerary fare alternative. The decision
variables will relate to the number of seats to be sold and we shall use the ODIF
codes in Table 4.16. So, for example, GAQ will refer to the number of seats sold at
Q class between Glasgow and Amsterdam.
The objective is to maximize total revenue. Using the fares shown in Table 4.16,
we can write the objective function for the linear programming model as follows:
Max 178GAQ þ 268GSQ þ 228GVQ þ 380GAY þ 456GSY þ 560GVY
þ 199EAQ þ 249ESQ þ 349EVQ þ 385EAY þ 444ESY
þ 580EVY þ 179ASQ þ 380ASY þ 224AVQ þ 582AVY

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