2. It is the practice of selling more tickets for a flight than the capacity of the airplane.
American Airlines estimates that, without the overbooking, approximately 15% of unoccupied seats when the plane took off.
As part of its yield management program, American Airlines uses quantitative decision tools to determine the optimal level of overselling.
Management attempts to maximize the return on overselling by explicitly taking into account various probabilities and the implications that decision has on revenues and costs.
These probabilities along with the costs of overselling and underselling are the key determinants of American Airlines' overbooking policy. For this reason, considerable effort is made to obtain good estimates of the probabilities. American Airlines expects an annual revenue contribution of more than $10, 000 million from this and other aspects of its performance management program.
Please identify what would be the probabilities that you visualize with the following questions:
1. What is the probability that a passenger will cancel?
2. How likely is it that a passenger with a reservation active does not show up on the day of the flight?