Airline overbooking with dynamic spoilage costs

Abstract

We analyse the revenue potential of incorporating passengers' willingness to pay (WTP) into airline overbooking. Today, overbooking models in commercial revenue management systems balance the risk and associated costs of empty seats and denied boardings using constant spoilage costs during the booking period. The paper examines time-dependent spoilage costs as an extension of the static overbooking model. Simulation results with real airline data indicate that considering the dynamics of passengers' WTP in the overbooking decision leads to consistent gains in net revenue.