Management strategy of full-service carrier and its subsidiary low-cost carrier

Abstract

Market competition in the air transportation industry has become increasingly more intense due to the emergence of low-cost carriers (LCCs). Consequently, some full-service carriers (FSCs) operate a subsidiary low-cost carrier to defend their market share against the rival low-cost carriers. This paper deals with the management strategy of an FSC and its subsidiary low-cost carrier (LCC(F)) that serves a single route along with a rival LCC. Assuming that, during a given time interval, the demand rate of an airline can be expressed as the product of the total demand size and its market share; we develop mathematical models to determine the flight schedule and airfare of each airline. To solve the model, regarding FSC and LCC(F) as one group and LCC as another group, the maximum objective function value of each group is obtained by a genetic algorithm while the repeated game model is utilized to find an equilibrium solution for the two groups. Sensitivity analysis is also performed to examine the effects of system parameters on the objective function value.