Airline overbooking performance measurement

Abstract

Since the "product" of an airline cannot be stored, the value of every seat which is left empty upon departure is lost forever or "spoiled". In order to compensate for the economic effects of passengers holding a confirmed reservation who fail to show-up, airlines overbook, i.e. accept more reservations than physical seats are available under the assumption that sufficient no-shows will occur. Even though airlines have overbooked their flights intentionally for decades, very few efforts have been made to measure the economic success of overbooking. As revenue maximization becomes more critical to the profitability of an airline, it is even more important to review the balanced tradeoff between denied boardings and spoilage. This thesis outlines the major philosophies of the currently applied overbooking models and illustrates further the common overbooking performance measurement approaches. As all of these models demonstrate significant shortcomings, a new model, the Revenue Achievement Model, is introduced. This new approach is based on a purely economics driven philosophy. Along with the Revenue Achievement Model, the different definitions of spoilage, oversales and other key values for the overbooking performance evaluation are reviewed and defined anew in an attempt to standardize the terminology. It is shown that the Revenue Achievement Model is more consistent with today's overbooking models than other overbooking performance measurement models. It matches the economic objectives of the airlines and shows superior qualities in comparing flights on a single flight level as well as evaluating the aggregate performance for large samples. The proposed methodology enables also to obtain a target performance index which allows a quantification of the objectives of overbooking. Finally, the impact of system overrides by revenue management analysts is analyzed and methods are suggested to evaluate their actions.