Forecasting and revenue management at Balearic Airlines

Balearic Airlines operates an afternoon flight from Barcelona to Mallorca on a daily basis. The company issues two types of tickets for this flight, Priority and standard Economy ones. There is typically high demand for Economy tickets from price-sensitive segments of the market, which creates the need to protect a certain number of seats in each flight for the more profitable Priority passengers that seek to purchase tickets closer to the date of the flight.

Carmen López, Senior Manager of Pricing and Revenue Management at Balearic Airlines, has to decide on the protection levels of the Barcelona-to-Mallorca flight for an entire week in the middle of October, in a way that balances spoilage (a flight leaving with empty seats) and dilution (rejecting requests for Priority tickets due to lack of capacity) in the best possible way. What complicates these decisions is the fact that they need to be made several months in advance of the flights, under significant uncertainty regarding the demand.