DR. GUILLAUME YON

If you have recently been online looking up for flights, you may have noticed that prices for airfares are always in flux. But what online shoppers usually do not know is that these dynamic price changes are enabled by large and intricate technological systems powered by cutting-edge science and technology.

These systems were first deployed by airlines in the United States in the 1980s. Up until today, they have been an object of intense scientific and technological research and development. When deploying such systems in airlines at scale, engineers and scientists blend statistics and probabilities, mathematical optimization, computer science, and economics, all this to implement sophisticated business strategies.

Dr. Guillaume Yon

Guillaume Yon is a historian of economics, who researches and teaches how the ideas that shaped our economic thinking emerged. He is particularly interested in the economic knowledge produced by engineers working in industry.

In the talk I delivered at the Käte Hamburger Kolleg ‘Cultures of Research’ on December 13th, I focused on what is often considered as the first of these systems: DINAMO. DINAMO stands for dynamic inventory and maintenance optimizer. It was developed at American Airlines and was fully operational in 1988. Similar systems were implemented at other major airlines in the United States around the same time, and these systems came to be known to specialists as ‘revenue management’ systems.

What was the problem that American Airlines’ engineers had to solve? As the airline industry was being deregulated in the U.S. (a process completed in 1978), American Airlines’ marketing department came up with a new strategy, which had two connected components.

The idea was to offer multiple price points for the same seats in the same class of service on the same flight. At the time, aircrafts had two classes of service, first and coach. Coach was the second class and main cabin, as in trains in Europe these days, and less like today’s economy seats in airplanes. In coach, American Airlines’ flights were regularly departing half-empty, hence the idea, in order to fill up these empty seats and avoid the associated loss in revenue, to stimulate a new demand, coming from people travelling for leisure. Before deregulation, air travel was a luxury product, and American Airlines was not alone in thinking that there was an untapped and potentially huge new market out there: middle-class families going on vacation, college students coming back home, young couples going away for the weekend, senior citizens visiting their children and grandchildren. However, these new leisure travelers were price sensitive, hence the need for a price discount to attract them, and fill the empty seats.

The second component was to prevent American Airlines’ already existing business customers, who travelled in coach too, from buying at the discounted price. Business customers were less price sensitive than the new leisure travelers, as they traveled on company money. They were willing to pay more for the same seat in coach. If business customers could buy the discounted fare, the new strategy would only result in a new source of revenue loss, this time from the business travelers’ side. American Airlines’ marketing department came up with the idea to tie the discounted prices to restrictions. For instance, American Airlines Ultimate Super Saver, a fare launched in 1985, was cheaper than the full fare for the same seats in coach. However, it was available only up to 30-days before departure (the so-called ‘advance purchase requirement’), had a steep cancellation fee, and was available only to those buying a round trip ticket with a Saturday night stay. Business travelers could not abide to those restrictions. They tended to book later and wanted to spend the weekends with their families. Therefore, even though discounted fares were available for a flight, business travelers would carry on buying at a higher price the seats on the same flight.

The outcome of American Airlines’ new pricing strategy was that for a given flight – from A to B, with a given departure date in the future – the seats in coach were offered at different prices with different restrictions (the lower the price, the more stringent the restrictions). These different ‘fare classes’ were available for sale at the same time. This new marketing strategy was a tremendous success for American Airlines, and it played an important role in turning air travel into mass transportation.

This tremendous success from a revenue perspective turned into a nightmare from a business process perspective. At American Airlines, hundreds of new revenue management analysts were hired, and they were struggling. Each revenue management analyst had a set of flights to manage. They needed to decide, for each flight, how many seats should be made available for sale in each fare class in order to obtain, at the flight departure, the mix of passengers which maximizes revenue. That decision needed to be made at first a year before departure, when the flight opened for booking. In the mid-1980s, there were at least three different fare classes in coach (the full fare, the Ultimate Super Saver, and a Super Saver in between), in addition to the first class, on each flight. Worse, American Airlines re-organized its network after deregulation as a hub-and-spoke, in order to efficiently serve more destinations domestically and internationally. Each path in the network with a connection at the hub also had at least three fare products in coach. For the local traffic, if the analyst allocated too many seats to the lowest fares, it could displace high paying business travelers. But allocating too few seats to the lowest fares could mean departing with empty seats, if high paying demand did not materialize late in the booking process. Simultaneously, for the same flight, the analysts needed to decide what the revenue maximizing mix of local and connecting traffic was. Was it best to have one more seat protected for a high paying business passenger on that flight, or have one more discounted passenger on the same seat but with a connection to a long-haul expensive flight? It depended on the price each of those two passengers paid, the likeliness of each passenger showing up for booking, and how full each of the two flights were. Humans could not possibly make all these decisions efficiently at scale. Therefore, around 1982/1983 American Airlines management tasked its operations research department with automating the process.

To automate the process, operations researchers started thinking from the actual available technology: SABRE (for semi-automated business research environment). SABRE was big tech at the time. It was the first global electronic commerce infrastructure, allowing travel agents to sell tickets through a dedicated terminal, connected to American Airlines inventory in real-time, by telephone transactions. SABRE was also an amazing database, as it recorded the numbers of bookings for each fare class on each flight. However, for revenue management analysts, this deluge of data was overwhelming.

American Airlines’ engineers aimed at overcoming the limitations of human decision-making through automation. To do so, they needed to redesign SABRE, which was simultaneously an information system (or a database, recording bookings in each fare class at the flight level) and a distribution infrastructure (a marketplace). They asked: how to expand it, and turn it into a pricing system (able to manage which fares were available for sale on each flight from a network flow management perspective)?

The articulation of that problem is historically significant. American Airlines’ operations researchers sought to solve a business problem, the implementation of a sophisticated new pricing strategy, which aimed at making pricing more dynamic, more market-responsive, more granular. But they did not look for the theoretically optimal solution. Instead, they sought to deploy a new technology. To do so, they started from an already existing technology, identifying the constrains and opportunities it offered. This already existing technology (SABRE) was a global electronic commerce infrastructure, i.e. the marketplace itself, coupled with a large database on bookings, i.e. customers’ purchasing behavior.

I spent most of the talk narrating how American Airlines’ operations researchers came to a solution. I tried to show how their thinking was shaped by the details of the distribution infrastructure: how airlines’ products were sold to customers through a computerized system, i.e. the features of the marketplace itself. I also tried to show how their thinking was shaped by the data (availability and size) and the computing power they had access to.

I argued that the crucial step to the solution was nothing spectacular, just a hack in SABRE called ‘virtual nesting’. This hack enabled the management at the flight level of the availability of the connecting fare classes, when working with two new components plugged into SABRE. First, an automated demand forecast, powered by statistical and probabilistic approaches, extracted the historical booking data in each fare class in each flight from SABRE, and then provided an expected revenue for each ‘virtual bucket’ on a flight. The expected revenue of a bucket meant the average price of the range of fare classes clustered in the bucket, weighted by the probability of having that many customers booking in that bucket. Second, an algorithm allocated a number of seats to each bucket of fare classes, given the average expected revenue for each bucket; this component was called the optimizer. The mathematics supporting the optimization were not trivial. American Airlines’ operations researchers used mathematical programming approaches which belonged to the standard toolbox of operations research at the time. However, these tools needed to be creatively applied to the specific problem at hand, accounting in particular for the limitations in computing power. This required the development of completely new heuristics. Overall, using mathematical programming to make pricing more dynamic, more market responsive, and much more fine-grained than it had ever been before in any industry, was an important innovation. And it all hinged on a hack in SABRE.

DINAMO opened decades of intense research and development to improve the ‘hack’, the forecasting, and the optimization. The underlying logic is still in use today, at least in the largest networked airlines. It directly inspired marketplace engineers in many industries, from Amazon to Uber, from hotels to concert tickets sellers. It features prominently in the training of the future generation of marketplace engineers. And if your local supermarket uses digital price tags on the shelves, it is likely that they are using a version of it too.

Sources

The knowledge produced by marketplace engineers is not widely shared beyond the community of specialists. Furthermore, it is very practical and operational, and for that reason not fully codified in the scientific literature. Therefore, the main sources for my research are interviews with the engineers and scientists who built these systems in airlines (50 people interviewed so far, and the list is still open!). I asked them how they proceeded, the resources they had, the environment they were working in, what their thought process was, their path to the solution. My interviewees also walked me through the technical literature they have produced, in particular technical presentations delivered at an industry forum called AGIFORS, the Airline Group of the International Federation of Operational Research Societies. This talk on DINAMO drew on my broader research project, in which I study the practices, forms of reasoning, and ways of thinking of engineers and scientists who built revenue management systems in the airline industry, from the origins in the 1980s to today. On DINAMO, the interested reader can start with this great paper that was published by its three main inventors: Smith, Leimkuhler and Darrow (1992) ‘Yield Management at American Airlines’ Interfaces 22 (1), pp. 8-31.

Proposed citation: Guillaume Yon. 2024. Marketplace Engineers at Work: How Dynamic Airline Ticket Pricing Came into Being. https://khk.rwth-aachen.de/2024/01/31/9192/marketplace-engineers-at-work-how-dynamic-airline-ticket-pricing-came-into-being/.

When we look back on the year 2023 at c:o/re, we can think of many great lectures, workshops and projects that we were able to realise in collaboration with our fellows and scientists from Aachen and around the world.

In this blog post, we take joy in remembering some of them:

Lecture Series

In the summer semester, the lecture series of c:o/re took place on the topic of “Complexity”. In seven lectures, the concept of complexity was examined from various disciplinary perspectives. You can reread some of the questions discussed in this and this blog post.

The lecture series for the winter semester 2023/24 began on 25 October 2023 with the topic “Lifelikeness”. Every two weeks until 7 February 2024, c:o/re fellows and guest speakers have discussed will continue to talk about the representations and imitations of life in its many forms. You can find all the dates in the program and impressions of some of the talks in the blog posts here and here.

Workshops

On 19 and 20 January 2023, the Marsilius Kolleg Heidelberg hosted the workshop “Navigating Interdisciplinarity”, which was organised in collaboration with CAPAS Heidelberg, the Marsilius Kolleg and c:o/re. The event brought together interdisciplinary research groups, mainly, but not only, from the humanities and social sciences to discuss the complex challenges of interdisciplinarity in the academic setting. The participants were able to discuss terms such as “complexity”, “security” or “collapse” as key aspects of interdisciplinary cooperation and research. You can read more about the workshop in this blog post.

On 14 and 15 March 2023, the workshop “Turning points in reflections on science and technology: Toward historicising STS” took place at c:o/re. The aim of this event was to analyse the turning points in the intellectual history of Science and Technology Studies (STS) in the course of the 20^th and 21^st centuries. The meeting illustrated the interdisciplinary and multi-perspective study of STS that is being conducted at c:o/re. Director Gabriele Gramelsberger and the fellows Ben Peters, Clarissa Lee, Kyveli Mavrokordopoulou, Jan C. Schmidt and Arianna Borrelli organised the event. They were joined by several renowned early career researchers from the STS field, such as Lisa Onaga (Max Planck Institute for History of Science, Berlin), Carsten Reinhardt (Bielefeld University), Salome Rodeck (Max Planck Institute for History of Science, Berlin), Vanessa Bateman (Maastricht University) and Andreas Kaminski (Darmstadt Technical University). A recap of the workshop can be found here.

Following on from the success of the first workshop “Varieties of Science: Patterns of Knowledge” in December 2022 at the Universidad Nacional Autónoma de México (UNAM) in Mexico City, the networking trips to institutes of science and transformation research were continued as part of the Varieties of Science activities. From 5 to 6 May 2023, a group of fellows and staff as well as the directors travelled to the Institute of Philosophy at the University of Bucharest for the workshop “Varieties of Science 2. European Traditions of Philosophy of Science: Unexpected Varieties” to discuss the differences in research cultures with international colleagues. You can read more about the talks and discussions in this blog post.

Another workshop took place from 13 to 14 June 2023 in collaboration with Dr. Thomas Haigh with the title “So What Was Artificial Intelligence, Anyway” at c:o/re. In the first part of the workshop, the history and philosophy of AI and digitalisation were discussed, with both the directors and the fellows being able to contribute their own research topics. In the second part of the workshop, Thomas Haigh presented the manuscript for his new book on the history of AI, which was followed by a discussion on the previously very heterogeneous concept of AI and the possibilities of standardising the various AI practices as a brand.

Conferences

From 15 to 17 February 2023, c:o/re hosted the international conference “Wissenschaften des Konkreten”, organised by Caroline Torra-Mattenklott, Christiane Frey, Yashar Mohagheghi and Sergej Rickenbacher from the Institute for Germanic and General Literary Studies at RWTH Aachen. The concept of the conference was not only, as the title indicates, inspired by Claude Lévi-Strauss’ concept of the “Science of the Concrete”, but also follows his assumption that the sensual and experimental interaction with the things of the environment is equally the origin of the “wild spirit” as well as of modern science. A summary of the event can be found here.

Together with the Rhine Ruhr Center for Science Communication (RRC), c:o/re directors Gabriele Gramelsberger and Stefan Böschen organised the conference “Nowhere(to)land? What science studies contributes to science communication” from 14 to 16 June 2023 in Bonn. Exciting questions and topics of science communication were discussed, including how the research fields of Science and Technology Studies (STS) and Science Communication Studies could be more closely linked in the future in order to fulfil the special communication requirements of science research results or how social participation in research could be implemented. The lectures and discussions also provided insightful impulses for the science communication at c:o/re.

STS Hub

From 15 to 17 March 2023, a new format for the interdisciplinary linking of different science research communities was launched for the first time: STS-Hub.de. This format, conceived as a biennial conference with changing hosts, provides an opportunity for networking and exchange for STS researchers from German-speaking countries and a connection between different disciplines and areas of specialization. c:o/re played a leading role in the local organisation. In over 65 individual panels, the approximately 300 participants found space and room for discussion. The overarching conference theme of “Circulations” resonated and was addressed in various topics ranging from experimental democracy and science communication to ethics and art. In addition to traditional panels, there were also innovative formats such as walkshops and fishbowl discussions. The desired non-hierarchical exchange between researchers from different backgrounds was thus promoted and achieved. The conference was framed by two keynotes by Ulrike Felt, short-term fellow at c:o/re in March 2023, on the infrastructurisation of circulation in the field of science and Susann Wagenknecht on leaks in circular infrastructures and markets. You can read more about the conference on our blog here.

“Leonardo” Project

This winter semester, c:o/re’s participation in the interdisciplinary courses of the “Leonardo” project continues with the module “Engineering Life: Imaginaries of Lifelikeness” at RWTH Aachen University, which is organised jointly with the fellows. The module is aimed at interested M.A. students from all subject groups who can earn credit points for their degree programme. On this website, you can find more information about the “Leonardo” project.

Summer School

c:o/re was one of the main organisers of the International Semiotic Summer School in Prague “Visual Metaphors”, which took place from 23 to 28 July 2023 in cooperation with the Palacký University Olomouc and the Charles University. Through various lectures and presentations, the Summer School explored visual metaphors and the epistemological changes brought about by the current technological revolution. 80 students from various European universities took part. In this blog post, RWTH Aachen students wrote about their experiences during the Summer School.

Social Media

On X (formerly Twitter), c:o/re is still very active by announcing events, reporting live from conferences and talks and giving updates on everything that is happening at the centre.

We are still figuring out whether leaving X and using alternatives such as Bluesky is an option. Have you already moved your Social Media activities off X?

Since September 2023, c:o/re is also active on Instagram in order to give some insights into the work happening at the centre in a more tangible and less text-heavy way through photos and videos. We have also just registered with LinkedIn.

You are cordially invited to follow us on our social media accounts.

Video series: c:o/re shorts

We have started a new video series: c:o/re shorts. Get to know our current fellows and gain an impression of their research. In short videos, they introduce themselves, talk about their work at c:o/re, the impact of their research on society and give book recommendations. Take a look at the first two videos:

Blogposts

We would like to thank all the authors who contributed texts to our blog in 2023.
We invite you to read through them:

1. What makes an ideal robot girlfriend?
2. The notebook pt. 3: “For 20 years, I haven’t used a pen” – a computer nerd’s confession
3. Research in Times of War – “Scientific Life Somehow Goes on…”
4. Research in Times of War – “The War Added One More Factor – the War Itself”
5. On Aryeh Ludwig Strauss: a German-Hebrew poet from Aachen
6. Supercharge the real-world impact of Research, Innovation and Enterprise with brand building methodologies

What is coming in 2024?

The Käte Hamburger Kolleg: Cultures of Research (c:o/re) is offering ten research fellowships for international scholars from the humanities, social sciences or STS as well as from natural, life and technical sciences for the academic year 2024/25. The fellowships can start between June and October 2024. The Call for Applications for 2024/25 is still open until December 31, 2023.

For the beginning of 2024, relationships with the arts will be strengthened with two upcoming collaborations. 

In February 2024, a workshop on “Art, Science, the Public Sphere” in collaboration with the research project “Computer Signals. Art and Biology in the Age of Digital Experimentation II” from Zurich University of the Arts will be held at c:o/re. As part of this, the artist Valentina Vuksic will present an artistic performance on the sonification of data “Listening to Science”, which will be accessible to students and researchers at RWTH but also to citizens of Aachen. 

In April 2024, the experimental conference “Politics of the machines: Lifelikeness & beyond” will take place in Aachen, which seeks to bring together researchers and practitioners from a wide range of fields across the sciences, technology and the arts to develop imaginaries for possibilities that are still to be realized and new ideas of what the contingency of life is. You can find more information about POM on their website.

You can subscribe to our newsletter to stay updated with all projects and events happening at c:o/re in 2024.

We are looking forward to everything that awaits c:o/re in the coming year. Stay tuned!