Integrating Overbooking with Capacity Planning: Static Model and Application to Airlines

Wen He

Production and Operations Management, 2019, vol. 28, issue 8, 1972-1989

Abstract: Many firms that practice overbooking are able to adjust capacity prior to the service time. This study proposes an integrated approach for a firm's overbooking and capacity planning. We formulate a static model that simultaneously optimizes the firm's capacity level and overbooking limit. We find that the optimal level of capacity with overbooking can be higher and lower than that without overbooking. This is because overbooking has both positive and negative effects on the marginal value of capacity. It suggests that the level of capacity can be set too low or too high if overbooking is not taken into account when making capacity planning decisions. Moreover, our analysis shows that overbooking leads to a lower optimal capacity level if and only if the marginal cost of capacity is below a threshold. It is also shown that a higher cost per denied service or a higher service level does not necessarily lead to a higher optimal capacity level. We then extend the static model to explicitly account for an airline's demand‐driven dispatch (i.e., reassignments of aircraft types to flight legs). Numerical experiments show that the integrated approach can significantly improve an airline's expected profit, compared to the sequential approach that optimizes capacity planning (aircraft type assignments) and overbooking decisions in two separate and consecutive steps. The benefit of the integrated approach remains significant when a service level constraint is imposed.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/poms.13022

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:28:y:2019:i:8:p:1972-1989

Ordering information: This journal article can be ordered from
http://onlinelibrary ... 1111/(ISSN)1937-5956

Access Statistics for this article

Production and Operations Management is currently edited by Kalyan Singhal

More articles in Production and Operations Management from Production and Operations Management Society
Bibliographic data for series maintained by Wiley Content Delivery ().