Options Contracts with Overbooking in the Air Cargo Industry. Issue 2 (12th April 2013)

• Record Type: Journal Article
• Authors: Hellermann, Rolf; Huchzermeier, Arnd; Spinler, Stefan
• Is Part Of: Decision sciences. Volume 44:Issue 2(2013)
• Page Start: 297
• Page End: 327
• Publication Date: 2013-04-12
• Subjects: Airlines -- Capacity Management -- Supply Chain Contracts -- Incentives; Decision making -- Periodicals; Policy sciences -- Periodicals; 658.40305
• DOI: 10.1111/deci.12008
• Languages: English
• ISSNs: 0011-7315

Abstract

ABSTRACT: In today's world economy, which is marked by intensified international trade, air cargo acts as a key facilitator. However, cargo airlines continue to struggle to be profitable because of very high asset costs and substantial demand uncertainty. To improve upon this situation, we propose an options contract. Our model captures the main features of cargo trade between an airline and a freight forwarder and allows us to derive an optimal reservation policy. We then go on to analyze the impact of overbooking on the profit of the cargo capacity provider. The model is subsequently applied to real‐life booking data provided by a major cargo carrier. This enables us to compare current contractual arrangements with the ones proven optimal in the model. A numerical study provides insights about the impact of overbooking on contract parameters and profitability. Managerial insights to be drawn conclude this study.