Transatlantic Airlines

Transatlantic Airlines

Decision and Risk Analysis

Transatlantic Airlines

Executive Summary

On the Transatlantic airline route between London Heathrow and New York JFK we were able to estimate that the current policy leads to an average cost of £10,281 per flight. There is a 48,3% probability that the cost will exceed £10,000. However, if there were no overbooking policy, the average cost would reach £41,017. The probability of reaching a cost over £25,000 in this case would be 100%.

Therefore, we propose a policy that will allow Transatlantic to reduce significantly the cost of overbooking. Our policy, which consists in differentiating business and economy class, will lead to an average cost of £3,307. Moreover, there will be a probability of 95% that the cost will remain under £8,000

Introduction

Transatlantic Airlines operates flights on several routes most importantly London Heathrow – New York JFK. They use an overbooking policy to optimize the number of passengers per flight: under the current policy, more tickets than available seats are sold to avoid flying an empty plane in the event passengers do not show. In the event passengers do show they will bump passengers onto other flights. This policy has its price, both in image and economically. The management of Transatlantic Airlines is looking to estimate the cost of this policy and to find a better model to reduce those costs.

Transatlantic Model

Based on the existing data, we were able to estimate that the average cost of the current policy for the economy and business class was £6,250 (s. Fig 1). This calculation is based on the consensus that the average number of no-shows in economy was 5% and 20% in business. Most people estimate that this figure varies between 3%-8% in economy and between 15%-30% in business; this has to be considered the main risk factor. Indeed, the capacity of the Boeing 747-400 is known and the number of passengers cannot exceed it....