Case Study: OVERBOOKING

Most airlines practice overbooking. That is, they are willing to make more reservations than they have seats on an airplane. Why would they do this? The basic reason is simple; on any given flight a few passengers are likely to be “no-shows.” If the airline overbooks slightly, it still may be able to fill the airplane. Of course, this policy has its risks. If more passengers

arrive to claim their reservations than there are seats available, the airline must “bump” some of its passengers. Often this is done by asking for volunteers. If a passenger with a reserved seat is willing to give up his or her seat, the airline typically will provide incentives of some sort. The fundamental trade-off is whether the additional expected revenue gained by flying an airplane that is nearer to capacity on average is worth the additional expected cost of the incentives. To study the overbooking policy, let us look at a hypothetical situation. Mockingbird Airlines has a small commuter airplane that seats 16 passengers. The airline uses this jet on a route for which it charges $225 for a one-way fare. Every flight has a fixed cost of $900 (for pilot’s salary, fuel, airport fees, and so on). Each passenger costs Mockingbird an additional $100.

Don't use plagiarized sources. Get Your Custom Essay on
Case Study: OVERBOOKING
Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT!
Order Essay

Finally, the no-show rate is 4%. That is, on average approximately 4% of those passengers holding confirmed reservations do not show up. If Mockingbird must bump a passenger, the passenger receives a refund on his or her ticket ($225) plus a $100 voucher toward another ticket.

How many reservations should Mockingbird sell on this airplane? The strategy will be to calculate the expected profit for a given number of reservations. For example, suppose that the Mockingbird manager decides to sell 18 reservations. The revenue is $225 times the number of reservations:

R = $225(18) = 4050

The cost consists of two components. The first is the cost of flying the plane and hauling the passengers who arrive (but not more than the airplane’s capacity of 16):

C1 = $900 + $100 * Min(Arrivals, 16)

The second component is the cost of refunds and free tickets that must be issued if 17 or 18 passengers arrive:

C2 = ($225 + $100) * Max(0, Arrivals – 16)

In this expression for C2, the $225 represents the refund for the purchased ticket, and the $100 represents the cost of the free ticket. The Max ( ) expression calculates the number of excess passengers who show up (zero if the number of arrivals is

16 or less.

Questions

1. Find the probability that more than 16 passengers will arrive if Mockingbird sells 17 reservations (Res = 17). Do the same for 18 and 19.

2. Find:

E(R|Res = 16)

E(C1|Res = 16)

E(C2|Res = 16)

Finally, Calculate

E(Profit|Res = 16) = E(R|Res = 16) – E(C1|Res = 16) – E(C2|Res = 16)

3. Repeat Question 2 for 17, 18, and 19 reservations. What is your conclusion? Should Mockingbird

overbook? By how much?

Homework Sharks
Order NOW For A 10% Discount!
Pages (550 words)
Approximate price: -

Our Advantages

Plagiarism Free Papers

All our papers are original and written from scratch. We will email you a plagiarism report alongside your completed paper once done.

Free Revisions

All papers are submitted ahead of time. We do this to allow you time to point out any area you would need revision on, and help you for free.

Title-page

A title page preceeds all your paper content. Here, you put all your personal information and this we give out for free.

Bibliography

Without a reference/bibliography page, any academic paper is incomplete and doesnt qualify for grading. We also offer this for free.

Originality & Security

At Homework Sharks, we take confidentiality seriously and all your personal information is stored safely and do not share it with third parties for any reasons whatsoever. Our work is original and we send plagiarism reports alongside every paper.

24/7 Customer Support

Our agents are online 24/7. Feel free to contact us through email or talk to our live agents.

Try it now!

Calculate the price of your order

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

We work around the clock to see best customer experience.

Pricing

Flexible Pricing

Our prces are pocket friendly and you can do partial payments. When that is not enough, we have a free enquiry service.

Communication

Admission help & Client-Writer Contact

When you need to elaborate something further to your writer, we provide that button.

Deadlines

Paper Submission

We take deadlines seriously and our papers are submitted ahead of time. We are happy to assist you in case of any adjustments needed.

Reviews

Customer Feedback

Your feedback, good or bad is of great concern to us and we take it very seriously. We are, therefore, constantly adjusting our policies to ensure best customer/writer experience.