Air cargo overbooking model with stochastic capacity and penalty cost under CVaR framework

Abstract

Overbooking has been studied intensively. However, those studies have paid little attention to the effect of penalty cost and degree of airlines' risk aversion on the decision-making. A cost model like a newsboy model is presented for optimal overbooking level of air cargo with stochastic capacity and penalty cost. Then the overbooking model of air cargo was proposed under the Conditional value-at-risk (CVaR) framework. The analytical results show the optimal overbooking level is monotonically decreasing about penalty cost regardless of the airfreight carriers' risk preferences. In contrast, the optimal overbooking level of risk-averse airfreight carriers depends on demand distribution and the degree of risk aversion, which may not be less than that of risk-neutral airfreight carriers.

A risk averse approach to the capacity allocation problem in the airline cargo industry

“…Unlike their predecessors, Zou et al (2013) consider multiple leg routes and solve the resulting optimization problem using a newsvendor problem with two locations. In Lei et al (2009), the authors propose a Conditional Value-at-Risk (CVaR) framework in which they consider spoilage and oversale costs. To the best of our knowledge, this is the only work that incorporated risk measures in the context of air cargo overbooking.…”

“…The expected value is the most common tool to deal with uncertainty, but its use implies that the decision maker is risk neutral. In reality, decision makers tend to be risk averse (Lei et al, 2009). As pointed out by Hubbard (2009), maximizing the expected revenue is not the only concern-it is also necessary to control the impact or the variability of losses.…”