Transatlantic Airlines Case

Decision Risk Analysis

TRANSATLANTIC AIRLINES CASE

Question 1:

Based on the current overbooking policy (5% economy, 20% business) and an assumed no show rate of 5% and 20% for economy and business respectively the total costs for empty seats and bumped customers would be £6,250 (£450 for economy and £5,800 for business no shows respectively.)

Question 2:

Before deciding whether to advocate a change of overbooking policy we quickly considered what the relevant objectives in terms of best outcome that we were looking for here (decision frame below). We agreed that the main objective here was to maximise profitability (simplistically revenue – costs) on this route alone. The uncertainties that were raised were around whether this route would have different expected no-show rates to other routes (probably) and whether recommending a change of overbooking policy would be appropriate for other routes (maybe not). Also we considered whether the real cost of bumping a passenger was acknowledged (probably not).

Given the “base case” scenario the current overbooking policy is suboptimal, as there are empty seats (1 economy and 4 business). Given this information it makes sense based solely on the base case situation to increase the booking level. Using trial and error the optimal level was found to be 421 economy seats and 125 business, reducing the overall cost to £0.

Question 3:

The pessimistic and optimistic scenario using the new overbooking policy is as below – the base case using a 5% and 20% no-show estimation for economy and business respectively produces the most optimistic outcome as a lower no show rate (than 5%) produces costs associated with bumping.

Pessimistic

Economy No-Show: 8%

Business No-Show: 30%

TOTAL COST: £23,250

Optimistic

Economy No-Show: 5%

Business No-Show: 20%

TOTAL COST: £0

The optimistic case in terms of minimising cost (and maximising route...