Two sides of Hidden City Ticketing: analysis of a choice-based network revenue management model

Speaker:Nanxi Zhang

Venue: Room 426, School of Economics Building, Zijingang Campus

Abstract: "Hidden City Ticketing" (HCT) is a strategy where customers book flights with layovers at their intended destinations and skip the final leg of the journey. Empirical studies on airfare data have shown that HCT chances are very prevalent (about 15%-25%) in airline pricing. In this paper, we investigate the impact of HCT on airline revenue and discuss if the airline should eliminate all HCT chances from its price to achieve higher profit. We use a choice-based network revenue management model to characterize the airline’s dynamic pricing problem. As airlines may penalize customers who purchase HCT by canceling frequent flyer miles and banning future travel with the airline, we capture customers’ concerns about the risks of HCT through a choice model. Our analysis shows that adjusting prices to completely eliminate HCT chances may overly constrain the pricing strategy, and it harms the airline revenue more than customers’ HCT purchase behavior. Furthermore, the impact of HCT is two-sided: While HCT can erode the airline’s revenue, it can also boost revenue in some cases. In the worst case, if customers purchase HCT, the airline’s revenue can be half of what it would be if customers don’t purchase HCT. In the best case, the airline’s revenue in the case customers purchase HCT can be twice that of the case where customers do not purchase HCT. Furthermore, the worst-case and best-case revenue bounds are both tight.