Overbooking and capacity control mechanisms in airline alliances : the application of options

航空聯盟中超售和艙位控制機制的研究 : 期權的應用

Student thesis: Doctoral Thesis

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  • Xiaojia WANG


Awarding Institution
Award date2 Oct 2015


From basic code sharing agreements to widely-promoted airline alliances, most of the legacy carriers nowadays capitalize on strategic partnership to expand their market share, reduce costs and increase their competitiveness. With the growing popularity of airline alliances, there comes a need for researchers to thoroughly examine how airlines can best apply revenue management techniques through their partnership. This thesis proposes and analyzes two novel option-based mechanisms for enhancing the overbooking and capacity control processes in airline alliances. The first part of the research introduces an option-based hedging mechanism for managing the risk of overbooking in parallel airline alliances. The concept of call options is applied and the seats on an aircraft are treated as the underlying assets of call options. This mechanism allows an airline to exercise options and transfer bumped passengers to its alliance partner’s flight so as to reduce their overall overbooking risk. Specifically, decision-making interactions between the two allied carriers are described to present the rationales of the mechanism. This study also discusses the motivations of both allied partners to join such a cooperative mechanism. By classifying customers into three types based on the perceived degree of their loyalty to the alliance, this research builds analytical models to project the net benefit that individual airlines as well as the alliance as a whole can obtain from the proposed mechanism. Since the non-monetary cost is considered when calculating the increase in profit, “net benefit” is used to represent “increased profit” in a broad sense throughout this research. Moreover, simulation procedures are employed to test the behavior of the proposed mechanism with hypothetical flights. The results show that the hedging mechanism can generate monetary and non-monetary benefit for allied carriers under some typical booking scenarios. The major benefit comes from the penalty cost saved by transferring bumped passengers to a partner’s flight. Furthermore, it is found that the net benefit obtained by the alliance as a whole could be smaller than the sum of the net benefit obtained by the two individual carriers. This forms the basis of analyzing the impact of bumping or transferring different types of customers on the alliance-wide revenue, thus provides managerial implications for airlines to make bumping-related decisions. In order to examine the best strategy in using the hedging mechanism, i.e., a best number of options that the partnering airlines should transact between each other, comprehensive simulation experiments are designed and performed to investigate the possible scenarios where the mechanism is beneficial for the alliance. From the analyses, it is found that the best number of options should be obtained under the objective of maximizing the alliance-wide revenue. The mechanism is effective since airlines can tackle the problem of overbooking in most of the cases. Moreover, simulation-based algorithms are developed for identifying the best number of options. The algorithms have been shown capable of providing airlines with guidance and recommendations to identify a best strategy in applying the proposed mechanism. The second part of the research focuses on improving the cooperation of airline alliance from the perspective of capacity control, another essential approach in revenue management. The study addresses capacity control problems in airline alliances which deal with the determination of booking limits of the alliance members. An innovative option-based capacity control mechanism is designed to overcome the drawback of inflexibility in blocked seat allotment in conventional two-airline alliances. The proposed procedures incorporate the concept of straddle, an advanced options strategy in finance, and allow alliance members the flexibility to adjust booking limits during the booking process. This mechanism can bring higher revenue to the code sharing airlines using blocked seat allotment, as shown in the case illustration. In summary, this thesis pioneers in designing the option-based mechanisms that purport to improve the overbooking and capacity control procedures in the fiercely competitive airline industry.

    Research areas

  • Revenue management, Strategic alliances (Business), Airlines, Management