PRICING AND REVENUE MANAGEMENT

LTC – Lebanese Transportation Company

Consulting Report

Mohammad Kassab

Rabih Hasbini

Table of Contents Executive Summary ........................................................................................................................ 3

Introduction .................................................................................................................................... 4

Methodology .................................................................................................................................. 5

The Metro ....................................................................................................................................... 6

Metro route ................................................................................................................................ 6

Scope .......................................................................................................................................... 7

Findings ...................................................................................................................................... 7

The Model .................................................................................................................................. 8

Assumptions ........................................................................................................................... 8

Network Revenue Management ............................................................................................. 9

Optimization ........................................................................................................................... 9

The New Metro Design ........................................................................................................ 11

Optimization of the New Model ........................................................................................... 11

Conclusion ............................................................................................................................ 12

Short comings of the model .................................................................................................. 12

The Busses .................................................................................................................................... 13

The Ethical Perspective................................................................................................................. 16

Appendix ....................................................................................................................................... 18

Survey 1 .................................................................................................................................... 18

Survey 2 .................................................................................................................................... 20

Optimization model for metro ................................................................................................. 21

First Model............................................................................................................................ 21

Second Model ....................................................................................................................... 21

Executive Summary

After almost 5 years since the introduction of Metro Dubai, we as a group are studying

the possibility of introducing a similar idea on the coastal line of Lebanon, along with a

private bus transportation company in Beirut.

The project which will be part of the revival of the transportation industry in Lebanon

will yield almost 243,150,000L.L of revenues only from charges of the Metro coming

towards Beirut, thus given this information and the fact that the Metro’s expenses per

day are almost 400,000 USD we believe that the project will be a success and will yield

profits for the Lebanese Government.

In the sections that follow we present our study of the whole project using multiple

revenue management techniques including Network revenue management and Surplus

management.

Towards the end of the report, we tackle some of the ethical issues that relate to the topic

along with the benefits of this project on different aspect of the Lebanese economy and

environment.

Introduction

Lebanese Transportation Company is a Lebanese firm which is targeting the

transportation industry in Lebanon. Considered one of the most crowded countries in the

Middle East and having the worst record in traffic accidents in the Arab world, Lebanon is

so desperate for an alternative and new safe public transportation system. This project

which is going to be studied and implemented by LTC consists of two modes of

transportation that together will bring financial and environmental benefits and will

complement the public transportation systems already available in the city. Since the

issue of public transportation has become a ‘hot topic’, we decided on working on a

project which would benefit the country and the population as well as generate profit.

On one hand in this project we will be targeting transportation between Lebanese coastal

counties, secondly we will try to implement our resources and benefit from them to ease

transportation inside Beirut.

A metro rail that passes along the Lebanese coast connecting the major coastal cities in

Lebanon that are commonly most related to each other might be the optimum newest

and most applicable systems that could be executed in the country to supplement the

other modes of transport, e.g. Buses, Taxis and Marine transport.

On the other hand, in order to improve our customer service and to assure providing an

exclusive riding experience to our passengers, we decided on adding another service

which will also help in reducing car traffic and will increase our contribution. Because of

the poor civic organization in the cities, the metro will not be able to arrive to inner

residential cities, however; we will exploit Beirut metro station, and use it as a bus station

too.

Methodology

We started our market study with a survey. We sent it to 200 people who were asked

about whether they will be willing to use a metro rather than driving their private car or

using public buses and services. We also tried to know people’s maximum willingness to

pay for such a service. [See Appendix]

Since we could not find any previous information or data about a similar study, we looked

carefully for information about Dubai’s metro which was considered as a huge success for

the country. We tried to benefit from their approach and relate the strategies they used

in pricing and segmenting to the scenarios we have.

Optimizing for the metro part of the project, we initially started solving by cutting the

metro in different booking limits and protection levels for more than one fare according

to demand and willingness to pay of each group of customers. However, because of the

huge differences in demand among different areas of the country and due to lack of

information, we found this approach to be suboptimal and moved to network revenue

management, which will be described below in details.

Regarding the Beirut bus system, we profited from the availability of data about

passengers’ willingness to pay and prices offered by other alternatives in the market and

used it to bring up the prices that will maximize customer satisfaction and pull passengers

towards our service rather than other services by offering low prices with good services

while still maximizing our revenues.

The Metro

Metro route

The Lebanese Metro will cover the coastal line of Lebanon from Tyre in the south to

Tripoli in the north. Stations will be present at every major city along the coastal line,

which include Tyre, Sidon, Beirut, Jbeil and Tripoli. The Lebanese Metro will cover a

length of 190 Km connecting more than 3,000,000 people around Lebanon. A view,

from satellites, of the area that the metro will cover is found below.

The Metro will cover the area drawn in red.

Scope

For the sake of simplicity and for making our study more reasonable, we will only

consider the metro heading towards Beirut for study.

Findings

To continue with our project, we decided to conduct a survey that would target people

from the segment that the metro targets. The survey was basically conducted in order to

ensure that a metro would be a welcomed idea in the Lebanon. We were able to survey

200 people from different places around Lebanon, mostly Sidon and Byblos, and we

were able to come up with the following important information.

1. We asked the people about their willingness to pay in order to board the different

sections of the metro, and the results we got were put in a spreadsheet and then

we computed the average willingness to pay for both section which turned out to

be 6500 L.L and 4000 L.L for the Gold and Silver sections respectively.

2. After providing the information about their willingness to pay, people were

asked if they would prefer riding in the gold or the silver section. 38% of the

people living in Sidon preferred the Golden section while, 43% of people from

Byblos preferred this section. For the other two cities, we assumed that the

people willing to enter the golden section will be 30%.

3. The last important finding we got from the survey is about student discounts.

More than 90% of the surveyed people believed that students should get special

discounts on their ticket prices whether in the golden or the silver section.

Along with the survey that we conducted we did some internet research on different

points that would help us in commencing our project. The most important was

getting the population in the four cities (other than Beirut) that include a metro

station. The results can be found in the table below.

City Population

Tripoli 600,000

Sidon 120,000

Byblos 60,000

Tyre 64,000

The Model

Assumptions

A few assumptions have been made in order to commence with our project. The

assumptions are listed below:

1. 10% of the people living in each major city will be heading to Beirut on each

single day. Thus our demand from each city will be = Population* 10%.

2. Since not all people will be using the metro, we assumed that 60% of that

demand is going to use the metro. Thus people using the Metro = Population *

10% * 60%.

3. The total capacity of a Metro train is 643, as in the Metro Dubai model.

4. The distances between the major cities in Lebanon, in which the stations are

present, is almost the same, 40Km. So we assumed that the distances are the

same, and thus the Metro covers the distance in the same time interval which is

30 minutes, given that its real velocity is 75Km/h. Then, 40/75 = 0.5 , which

means 30 minutes.

Network Revenue Management

Network management is important in industries that wish to gain from revenue

management approaches, especially industries that sell products that consist of more

than one resource. Network Revenue Management can lead to important increases in

profitability compared to managing revenue by fare classes.

Optimization

After demonstrating the need of network revenue management in the case of our

Metro we now move to the optimization on excel. The following data were entered:

Decision Variables: Xi X: number of passengers boarding the metro from each

ODF.

Objective: MAX Total Revenues

Constraints: Xi >= 0

Xi <= Demand

Number of people boarding the metro on a particular day is less

than total capacity of the metro over a whole day.

Number of people boarding the metro from a particular city is less

than or equal to the demand from this city.

The optimization of the model gave us the following results:

People boarding from Tyre to Sidon Gold: 1152

People boarding from Tyre to Sidon Silver: 2688

People boarding from Sidon to Beirut Gold: 2736

People boarding from Sidon to Beirut Silver: 4464

People boarding from Tripoli to Byblos Gold: 6173

People boarding from Tripoli to Byblos Silver: 14403

People boarding from Byblos to Beirut Gold: 1548

People boarding from Byblos to Beirut Silver: 2052

Yielding Total Revenues of 169,886,000 L.L.

This model although is fulfills the demand of Tyre, Sidon and Byblos misses greatly

on the demand of Tripoli. People demanding a silver ticket from Tripoli is 25200 yet

only 14403 from them are granted the ticket because of the capacity constraint.

Because of this problem we decided to make changes to the Metro model and

design.

The New Metro Design

After facing problems with the previous model, our team decided that some changes

need to happen if we want to solve the problem of people demanding tickets from

Tripoli. The new idea is to change the routes of the metro and split them into two

routes. The first is from Tyre towards Beirut including Sidon, and the second is from

Tripoli towards Beirut including Byblos. Moreover, the capacity of the metro trains

is not the same along the two routes due to demand differences. On the first route the

capacity of each Metro train is 250 while it is 600 on the second track. Moreover, the

number of trains on each track differs. The first track has 4 trains and thus a train

reaches each station every 30 minutes, while the second track has a total of 8 trains

and thus reaches a station every 15 minutes. The difference in the number of trains

and the time intervals is all due to demand.

Optimization of the New Model

After changing some of the features of the Metro and the tracks, we re-did the

optimization problem based on the Network Revenue Management system, with the

same decision variables and objective function, yet with minor changes in the

constraints as we had to accommodate for the changes in capacity of the trains in

each route.

The results on this new optimization are ideal, as we were able to accommodate for

all the demand that was generated and thus were able to reach a optimal result we

were hoping for which is seating all demand while maximizing our revenues. The

results of the new optimization are the same as the old results, with a change in the

Tripoli-Byblos seated passengers.

People boarding from Tripoli to Byblos Gold: 10800

People boarding from Tripoli to Byblos Silver: 25200

Yielding Total Revenues of 243,150,000L.L.

Conclusion

We can see from the previous results that the improved model has yielded a higher

amount of profits than the first model. The new model has increased profits by 43%

from 169,886,000 L.L to 243,150,000L.L.

Short comings of the model

The model that we are working on is definitely not an ideal model due to some deficits.

One major deficit is that the model is a deterministic model. This is due to the fact that

the demand in the model is deterministic and not probabilistic. Another flaw in the

model is the fact that Network Revenue Management is not the optimal solution for such

0

50000000

100000000

150000000

200000000

250000000

300000000

0 0.5 1 1.5 2 2.5

Revenues

Revenues

problems, yet it is a practical solution that would lead to satisfying results in most of the

cases.

The Busses

The project also includes a private bus network station right next to Beirut’s main metro

station. By introducing the bus station we can accommodate to the transportation of

tourists, the workforce, and the students and maximize consumer welfare. The buses will

have 2 routes that will cover almost all Beirut. The routes are as follows.

Route 1:

Waterfront DT

Waterfront Ain el Mreisse

Waterfront AUB

Waterfront Hamra

Waterfront LAU

Waterfront Koreitem

Waterfront Verdun

Waterfront Jnah

Waterfront Mazraa

Waterfront Mar elias

Route 2:

Waterfront Monot

Waterfront Sodeco

Waterfront Ashrafieh

Waterfront Adlieh

Waterfront

Furn el

Chebbak

Waterfront Hazmieh

Waterfront Ghobeira

Waterfront Salim Slem

Service off-peak price

WTP BUS OFF PEAK 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 2000

2000 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 0

2000 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 0

3000 2000 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 1000

3000 2000 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 1000

waterfront 1500 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 -4500 -500

Hamra 2000 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 0

2000 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 0

1500 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 -4500 -500

2000 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 -4000 0

2500 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 -3500 500

demand 10 10 8 3 2 0 0 0 0 0 0

revenues 10000 15000 16000 7500 6000 0 0 0 0 0 0

Price Range

The first route buses will make 10 stops some of which are Downtown, Koreitem, Mar

Elias, Verdun, Hamra, and Ain el Mreisse for work and tourist purposes; AUB and LAU

for student purposes. The second route will cover 8 locations which include the other

major parts of Beirut such as Achrafieh and Sodeco.

The private bus system that we decided to implement will be modeled around a surplus

pricing strategy. The buses will only take people from waterfront to these locations and

will not pick anyone on the way. We decided to survey the people of Beirut about how

much they would be willing to pay for a bus ride from Waterfront to each and every

location we designated at off-peak and at peak hours. We decided to offset this

willingness to pay distribution against the major transportation means in Beirut which is

the “Service”. We got how much the “Service” charges a customer from Waterfront to

each location designated at off-peak and at peak hours. An assumption was made that

peak hours were from 7:00am till 9:00 am and from 3:00pm till 5:00pm. These 4 hours

were set as peak and the other 12 hours were off-peak hours since we operate 16 hours a

day.

Throughout the survey and the public bus system, we set a price range from 1000 LBP

to 6000 LBP in order to get the surplus from each location at both peak and off peak

hours. We will take Waterfront-Hamra as an example.

Service Peak Price

WTP BUS PEAK 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 2000

4000 3000 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 2000

4000 3000 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 2000

5000 4000 3500 3000 2500 2000 1500 1000 500 0 -500 -1000 3000

5000 4000 3500 3000 2500 2000 1500 1000 500 0 -500 -1000 3000

waterfront 3500 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 1500

Hamra 4000 3000 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 2000

4000 3000 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 2000

3500 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 1500

4000 3000 2500 2000 1500 1000 500 0 -500 -1000 -1500 -2000 2000

4500 3500 3000 2500 2000 1500 1000 500 0 -500 -1000 -1500 2500

demand 10 10 10 10 10 10 8 3 2 0 0

revenues 10000 15000 20000 25000 30000 35000 32000 13500 10000 0 0

Price Range

We can see from the model the WTP distribution at off peak hours from a sample of 10

people and the surplus at each price we set from the range offset with the “Service” off

peak price of 2000 LBP. Using the “Countif” function, we got how many of the surplus

at each price is positive or at least 0 against the “Service” price and that was our demand

at each price. Getting the revenues at each demand with its price we can see which price

will maximize our revenues at this specific off peak hour route. In this example we get

16,000 LBP in revenues at a demand of 8 and a price of 2000 LBP. As for the peak

hours of this route we have

Collecting these information for each of the 18 locations we have we can get our optimal

total revenues.

The private bus system will only be implemented in the city of Beirut since it’s the

capital of Lebanon and all tourist attraction sites are there as well as major workplaces

such as Solidere, and banks as well as the major universities such as AUB and LAU.

The buses will leave every 30 minutes to accommodate for the metro stops and we will

have 4 buses at each of the 2 routes to accommodate for traffic issues.

The Ethical Perspective

Our new project will:

Provide reliability, ease and comfort.

Target environmental concerns through decreasing the amount of pollution each

individual is creating at one time since the sheer number of people would take the

same transportation mode (metro) and use less number of cars among and inside

the countries.

Decrease transportation costs for the individual especially since the gasoline

prices continue to increase.

Minimize traffic jams and congestions: decrease car usages and reduce the deadly

accidents that are frequently accruing especially on highway streets linking coastal

countries. Because many students living in Byblos for example drive daily to Beirut

to attend their classes at AUB and other employees use their private cars to go to

their work each morning, massive traffic jams could be reported during early

hours of the day and in the evening. In addition to this, it can be estimated that

there are at least two cars within each family, and increasingly all members of the

family that are eligible to drive are purchasing a car of their own. This phenomena

not only presents both traffic and pollution problems; but also creates a problem

for parking spaces.

Eco-friendly system: the new metro will not have the risk of causing noise

pollution or parking spots being taken by those using the transport system since it

will be built on the Lebanese coast line.

Modernity: The fact that the Metro is being built in the 21st century make it

smoother, safer, faster, and cleaner than practically any other similar mode of

transportation.

Outlying regions: The Metro's route is set to include several outlying areas, and as

such will give people living in those areas opportunities in the city that would

otherwise be denied them.

Cheap. – Money saving because the cost of ticket for riding the metro is definitely

lower compared to gas, car maintenance and amortization/ insurance of your car.

Environment-Friendly. – Less traffic on the streets and your share in saving the

earth from pollution emitted from your car.

Convenience – You can reach your destination on time and without any problems

with traffic which makes riding the metro a good thing to do.

The advantages of rail transit systems exceed any other form of mass ground transport

in dependability, speed, ease, comfort and safety. Such a system will reduce land

consumption, congestion, as well as air and noise pollution. Electric train systems

significantly cut dependence on oil but with our continuous power outages in Lebanon,

we might face some difficulties. Actually, two of the possible drawbacks we might

encounter in a metro project in such a country like Lebanon are the dependence on

electricity as well as the high cost it will incur.

Appendix

Survey 1

This survey about a Metro in Lebanon is conducted as part of a student project in the

American University of Beirut.

1. Would you consider using a Metro in Lebanon?

Yes

No

2. The Metro will be divided into classes, a Gold higher class and lower Silver class, the

Gold will provide more services.

How much would you be willing to pay for the Gold Ticket?

How much would you be willing to pay for the Silver Ticket?

3. Would you board the train on the Gold or Silver side?

Gold

Silver

4. What is your preferred payment method?

Pre-paid Cards

On the spot

5. Do you think a Metro in Lebanon would decrease traffic?

Yes

No

6. Do you believe student should get a discount?

Yes

No

Survey 2

How much are you willing to pay for a ride from Beirut Waterfront to the following

destinations within Beirut?

DT

Ain el Mreisse

AUB

Hamra

LAU

Koreitem

Verdun

Jnah

Mazraa

Mar elias

Monot

Sodeco

Ashrafieh

Adlieh

Furn el Chebbak

Hazmieh

Ghobeira

Salim Slem

Second Model

Number ODF Fare Demand People Seated Capacity ( G/S ) Total Capacity / Day

1 Tyre- Saida Gold 6500 1152 1152 6176 20576

2 Tyre-Saida Silver 4000 2688 2688 14403

3 Saida-Beirut Gold 6500 2736 2736 7840

4 Saida-Beirut Silver 4000 4464 4464 12758 Tyre Saida 3840

5 Tripoli-Jbeil Gold 6500 10800 6173 6173 Saida Beirut 7200

6 Tripoli-Jbeil Silver 4000 25200 14403 14403 Tripoli Jbeil 20576

7 Jbeil-Beirut Gold 6500 1548 1548 8848 Jbeil Beirut 3600

8 Jbeil-Beirut Silver 4000 2052 2052 11728

Revenues 169,886,000

Number ODF Fare Demand People Seated Capacity Capacity Tyre-Beirut

1 Tyre- Saida Gold 6500 1152 1152 2400 8000

2 Tyre-Saida Silver 4000 2688 2688 5600 Tyre Saida 3840

3 Saida-Beirut Gold 6500 2736 2736 3040 Number of Carts from Tyre to Beirut Saida Beirut 7200

4 Saida-Beirut Silver 4000 4464 4464 4960 4 Tripoli Jbeil 36000

5 Tripoli-Jbeil Gold 6500 10800 10800 11520 Jbeil Beirut 3600

6 Tripoli-Jbeil Silver 4000 25200 25200 26880 Capacity Tripoli Beirut

7 Jbeil-Beirut Gold 6500 1548 1548 16512 38400

8 Jbeil-Beirut Silver 4000 2052 2052 21888

Number of Carts from Tripoli to Beirut

8

Revenues 243,150,000

Optimization model for metro

First Model