Business Analytics at American Airlines
Background: Several new airports have opened, opening the market for new routes (a route refers to a pair of airports). American Airlines is evaluating its fare (ticket price) decisions on these new routes.
Southwest, a discount airline, is a competitor of American Airlines. Southwest's strategy (point-to-point routes covering only major cities, use of secondary airports, standardized fleet, low fares) has been very different from the model followed by the older and bigger airlines like American Airlines (hub-and-spoke model extending to even smaller cities, presence in primary airports, variety in fleet, pursuit of high-end business travelers). The presence of discount airlines is therefore believed to reduce the fares greatly. To stay competitive, American Airline needs to consider whether Southwest is serving on a route.
Dataset: American Airlines has provided you with a dataset called KnownRoutes.csv which contains real data that was collected for the third quarter of 1996. The table below summarizes the variables in the KnownRoutes.csv dataset. Note that some cities are served by more than one airport, and in those cases the airports are distinguished by their three-letter code.
Objectives
1) Data exploration and preparation:
• Execute business understanding, data understanding and data preparation steps. Summarize your findings and justify any modifications you made to the dataset.
• Explore the numerical and categorical predictors that can be used to predict the average fare on a route. Which predictors seems to be the best, and why?
2) Building a predictive analytics model:
• Generate at least three predictive analytics models to be used to predict the average fare of a route. To demonstrate the breadth of your expertise, please plan to apply various techniques to build and improve the models you are proposing.
• Provide a predictive performance comparison among all the models you investigated. Identify the best model and justify your selection.
3) Building a prescriptive model: Build a simulation model to help American Airlines understand the revenue that might be earned from a new route that is being planned. Your model should address the uncertainties about whether Southwest will serve on a route, what the average fare on that route will be, and the number of passengers who will travel on that route. American Airlines provided the following information to be used to build your simulation model:
• The probability that Southwest will serve on this new route is 0.7.
• The number of passengers is approximately normally distributed with mean 4700 and standard deviation of 500.
• The market share of American Airlines, in other words the fraction of passengers that travel with American Airlines on this route, is expected to be 17.6%. If Southwest is not serving on a route, American Airlines does not expect market share to be impacted by the ticket fare. However, if Southwest is serving on a route, customer behavior is more price sensitive. American Airlines estimates that 20 customers are lost for each dollar charged over the average fare price and 20 customers are gained for charged below the average fare price.
• The goal of American Airlines is to maximize their revenue. American Airlines is considering three options for setting its ticket fares on the new routes: 1) 90% of the average fare, 2) same as the average fare, or 3) 110% of the average fare. American Airlines would like your input on which pricing strategy is preferable on each route.
Using your simulation model, how would you compare the three pricing strategies American Airlines is considering according to the results from your simulation model?
4) Your business analytics vision: Provide a recommendation about other business analytics questions you can answer with your skill set that would help American Airlines improve their operations. As you describe your vision, please be specific with respect to the pros and cons of your suggestions and data that would be required to implement them.
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