aa case write up

8/7/2019 AA CASE WRITE UP

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PART 1:

OBJECTIVE

The basic objective is to fill seats on each flight with the highest paying passengers by determining the

optimal mix of fares to sell in order to obtain the highest possible revenue.

INFORMATION

The following information is given from the case:

y The flight route is from Dallas Forth Worth(DFW) to Miami(MIA)

y We are scheduled to use a Super 80 jet with a capacity of 125 seats

y We are given 20-25 booking opportunities where the tickets are fully refundable

y A new bid price is allowed for each booking opportunity

y Fares for this flight historically range between $170-$750 and there is far more demand at the

lower end than the top end

y Not all passengers show up for their flights, 15% for local passengers and 20% for flow

passengers

y The penalty for unsold seats is $150

y Penalties for oversold seats include: $100/passenger for 5 or fewer passengers, $250/passenger

for 6-10 and $500/passenger for more than 10

CONTROLS

The bid price is only used to trigger accepting or rejecting a booking. . In case the passenger-requested

booking price (Prorated fare) for the flight is equal to or greater than our bid price, we must accept the

entire number of passengers at the prorated fare requested by the customer. If the prorated fare is less than

our bid price, the request cannot be accepted. Consequently, final revenue is to be calculated based on

prorated fare, rather than the bid price set by us.

FORMULATION

In order to maximize revenue and minimize spoilage costs we must set appropriate bid prices. The

booking is accepted only if the prorated fare is greater than or equal to the bid price. We must use the



profit maximization formula which is subtracting over sale and spoilage costs from total revenue. Some

constraints apply, which include a cost of $150/seat if we undersell (below 125), and over sale costs

according to the number of seats oversold.

Thus the profit maximization formula is as follows:

Profit = ( P x N) - ($150 X ES) - {$150 X OP if OP � 5,

$250 X OP if 6 �OP �10,

$500 X OP if OP � 11}

Where

P= Prorated prices

N = Number of tickets sold at prorated prices

ES= # of empty seats

OP= # of over sale passengers

PART 2:

The following table depicts the number of days to departure, number of booked passengers, & the prices

charged for the flight leg

Time to departure in days # of booked passengers Price in dollars charged

180 0 250

90 85 280

14 (last day to buy excursionfares)

105 330

2 123 500

1/12 ( 2 hours before departure) 125 425

The next table depicts how urgently the tickets must be sold at a given point in time.

Time to departure in days (t) Number of unsold tickets/empty

seats left (n)

Urgency ratio (n/t)



180 125 X (1+((0.15+0.20)/2)=146 0.811

90 146-85=61 0.678

14 146-105=41 2.929

2 146-123=23 11.5

1/12 (2 hours until departure) 146-125=21 252

aa case write up

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