air cargo overbooking by silvia ito december 2 nd, 2009
TRANSCRIPT
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Air Cargo Overbooking
By Silvia ItoDecember 2nd, 2009
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Introduction
•Companies have started to ship their freight (cargo) more by air due to:▫Globalization of trade▫Increasing use of advanced logistics
techniques▫Rise of e-commerce
It is said that the air cargo traffic will expand 3 times more than now for the next 2 decades!
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Introduction
•Air-Cargo Supply Chain’s major players:▫Shippers▫Freight Forwarders (FF)
Third party logistics provider that books/arranges cargo spaces for shipments.
▫Airlines
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The booking process
•6 to 12 months before flight departure:▫Freight Forwarders bid for cargo space
with airlines in order to accommodate shippers demand.
Allotted Capacity: Cargo capacity completed during the auction process.
Cargo Capacity: Remaining capacity for free-sale.
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Air Cargos
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Cargo Capacity
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The booking process
•Airlines must manage Cargo Capacity effectively, given the potential revenues from air transportation of freight.
•Cargo Capacity is perishable and is limited.▫Perishable: Can be sold at different prices
(depending on service: express or normal)
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Revenue Management
•Revenue Management (RM) has been used for a while in the passenger business.
•Airlines seek to adapt the same techniques to cargo business.
•However, passenger and cargo differ in important ways.
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Passenger VS Cargo RMPassenger Cargo
• Space constraint: ▫ 1 dimensional:
Seat
• Time window which airline offers capacity for free sale: ▫ Longer
• Space constraint:▫ 2 dimensional :
Weight and Volume
• Time window which airline offers capacity for free sale :▫ Shorter (no more than
30 days before departure)
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Factors affecting available capacity
•Freight Forwarders (FF) bid on more capacity than needed (to ensure space on constrained flights).▫FFs are allowed to return unwanted space at
no charge. Airlines don’t charge for changing reservations. You can cancel a booking, rebook to a different flight, cancel again, rebook back, etc
•After the bids, airlines add the completed spaces to the pool of capacity available for free sale
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Factors affecting available capacity
•Thus until flight departure date, airlines don’t know how much:▫ Cargo Capacity they have available for
free sale▫Allotted Capacity will be unused
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Factors affecting available capacity
•Combination carriers (planes carrying cargo and passengers) cargo space contains both passenger’s baggage and cargo in the same compartment.
•All these factors plus:▫Weather (it affects the amount of fuel on
board the aircraft) and Mail influences how much capacity is available for free sale
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Why Overbook?
•Airlines’ sell more capacity than what’s physically available to compensate for cargo that doesn’t show up at departure.
•Airlines commonly overbook their capacity to protect themselves from:▫Variability in the amount of cargo actually
given at departure.▫Customer’s cancellations.▫(and possible financial loss of course)
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Important considerations in overbooking•1) Spoilage
▫Excess capacity at departure ▫(you turned demand away!)▫Caused by having a low overbooking level
•1) Off-loads▫More capacity demanded than avail at
departure ▫(You cannot accommodate the booked
demand!)▫Caused by having a too high overbooking
level
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Overbooking Model
•Overbooking Model’s goal:▫To minimize lost revenue (spoilage) and
excessive cargo off-loading
•Overbooking Model:▫Passenger sector formulates it as a
Newsvendor problem
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Overbooking Model•Newsvendor Problem:
▫Normal Distribution
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Cargo Show-Up Rate Model
•Airlines base their decisions on:▫Predictions of show-up rate
% of demand booked that shows up at departure
▫Show-up rate (SR) for weight and volume are estimated separately, so for weight:
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Normal or Discreet?
•Passenger sector:▫Uses Normal Distribution to estimate show-
up rate▫Good for approximation
•Air-cargo sector▫Normal Distribution is NOT a good fit for
estimating show-up rate.▫This case proposes to use a Discrete
Distribution
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Overbooking Model•Newsvendor Problem:
▫Discreet Distribution
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Why Discrete Distribution?
•For the Show-up rate:▫Discrete estimator outperforms normal
estimator in various aspects: Overbooking levels Average yearly savings Improved customer satisfaction Increased profits
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Discrete estimator is better!• Overbooking levels
▫ Better approximation of capacity at departure in terms of MAE (Mean Absolute Error) between bid cargo and actual capacity at departure, standard deviation of error (SE), spoilage, and off-loads.
• Average Yearly Savings▫ For combination carrier with 300 flights/day and average cargo
capacity per departure of 13,000kg, savings were $16,425,000
• Better customer service▫ Lower mean spoilage = better utilization of capacity = more
customers served promptly▫ No increase in off-loads = airline turns down fewer customer
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Notes:• This PPT presentation was for DESC372 class.
• Students were supposed to present cases given by professor, thus this presentation summarizes the key aspects of the case in relation with what we studied in class (Revenue Management: Overbooking, Newsvendor Problem, etc)
• This presentation was made by a student and posted online for Concordia students studying Supply Chain Operations Management.
• Case: Andreea Popescu, Pinar Keskinocak, Ellis Johnson, Estimating Air-Cargo Overbooking Based on a Discrete Show-Up-Rate Distribution, Interfaces, Vol. 36, No. 3, May–June 2006, pp. 248–258.