Should Airlines Overbooked?alumni.media.mit.edu › ~carlagm › lab › OBpresentation.pdf ·...
Transcript of Should Airlines Overbooked?alumni.media.mit.edu › ~carlagm › lab › OBpresentation.pdf ·...
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Should Airlines Overbook?
Systems Dynamics for Engineers
May 12, 2003
Luke OukoArnan Sipitakiat
Carla Gomez-Monroy
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Content
• Problem Statement and Motivation• Modeling Goals• Assumptions in the Model• Behavior of airline with and without overbooking• Finding an optimal overbooking policy• Problems Encountered• Lessons Learned• Conclusion and Future Direction
Should Airlines Overbook?
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Problem Statement and Motivation
We were concerned about whether or not overbooking leads to higher airline profit both in the short and long term.
We set out to find out what influenced as well as was influenced by overbooking in the airline industry.
Should Airlines Overbook?
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Modeling GoalsHow does Overbooking affect:
• Customer Satisfaction • Profit• Demand
Should Airlines Overbook?
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General Assumptions
• The Model is over a period of 7 years• The market demand is high for three months (Nov-
Jan) and less than the full capacity for the rest of the year.
Should Airlines Overbook?
DemandLookUp1
0.9
0.8
0.7
0.61 640 1278 1917 2555
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Assumptions/Figures for Customer Satisfaction
• Customer Satisfaction is only measured by Overbooking.
• Customer satisfaction is reduced only when passengers are involuntarily bumped.
• External Influences are not considered.
Should Airlines Overbook?
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Assumptions/Figures for Profit Modeling
• There is a fixed cost of $ 100,000 per flight• There is a random no-show rate varying between 5%
and 10%• There are variable costs only from rescheduling of
passengers and no others• The cost of bumping a customer is $100• There are no increased costs levied on customers
that do not show up• The prices of all the tickets are $600.00
Should Airlines Overbook?
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Assumptions/Figures for Demand Modeling
• Our plane capacity is 250 passengers• There are no classes in the plane (All seats are
economy)• All passengers that pay for tickets will eventually
travel
Should Airlines Overbook?
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ModelShould Airlines Overbook?
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Simplified ModelShould Airlines Overbook?
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Should Airlines Overbook?
No overbookingvs
10% overbooking
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Should Airlines Overbook?
Stuck PassengersStuck passenger on current flight
80
60
40
20
00 365 730 1095 1460 1825 2190 2555
Time (Day)
60
20
▬▬ No overbooking ▬▬ 10% overbooking
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Should Airlines Overbook?
Passenger Satisfaction
0 365 730 1095 1460 1825 2190 2555Time (Day)
1
0.6 6
▬▬ No overbooking ▬▬ 10% overbooking
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Should Airlines Overbook?
Demand over seven years
0 365 730 1095 1460 1825 2190 2555Time (Day)
1
0.6
▬▬ No overbooking ▬▬ 10% overbooking
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Should Airlines Overbook?
ProfitProfit
40 M
30 M
20 M
10 M
00 365 730 1095 1460 1825 2190 2555
Time (Day)
40M
0P fi 1
▬▬ No overbooking ▬▬ 10% overbooking
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Finding an optimal overbooking policy
How important are these factors to managers?• Re-Scheduling Expense• Opportunity Loss• Stuck Passengers
Should Airlines Overbook?
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-1
1
D
( )1
1
21
−
−
=−
DA
CFactor
l
Quantifying FactorsShould Airlines Overbook?
A = Actual InputD = Desired InputC = Curve constant
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Should Airlines Overbook?
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ModelShould Airlines Overbook?
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Should Airlines Overbook?
Overbooking factor1.1
1
▬▬ Customer-centered policy ▬▬ Company-centered policy
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Should Airlines Overbook?
Bumped PassengersBumped
0 365 730 1095 1460 1825 2190 2555Time (Day)
200
0
▬▬ Customer-centered policy ▬▬ Company-centered policy
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Should Airlines Overbook?
Passenger Satisfaction
0 365 730 1095 1460 1825 2190 2555Time (Day)
1.0
0.6
S F 2
▬▬ Customer-centered policy ▬▬ Company-centered policy
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Should Airlines Overbook?
Ticket Demand
0 365 730 1095 1460 1825 2190 2555Time (Day)
1.0
0.4
d 2
▬▬ Customer-centered policy ▬▬ Company-centered policy
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Should Airlines Overbook?
Profit40M
0 365 730 1095 1460 1825 2190 2555Time (Day)
0
▬▬ Customer-centered policy ▬▬ Company-centered policy
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Problems encountered
• Information gathering of business strategy information is extremely difficult
• Modeling qualitative concepts such as customer satisfaction is very
• A myriad of external factors influence the industry• Infinite loops exist between facets in the model
Should Airlines Overbook?
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Lessons Learned
• The industry is extremely sensitive to minor changes due to the low profit margins
• Different approaches are adopted by airlines to ensure that repeat customers are gained
Should Airlines Overbook?
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Conclusion and Future Directions
• While the actual amount of bumping is low the implications are huge to the profitability
Should Airlines Overbook?
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Thank You !!!
Systems Dynamics for Engineers