Things That Go Bump in the Flight 275 Compounded overbooking takes care of itself (i.e goes away naturally) Consistentindustry-wide statistics establish a 60% to 80% load factor [Airline Transport Association 2002, resulting in naturally combating the waterfall effect of one overbooked flight causing another to be even more overbooked There is sufficient demand for at least some flights to warrant overbooking. No-shows do not generate revenue. No-shows are given a refund or (if original ticket was nonrefundable)a ticket voucher. Taxes paid by a passenger are nonrefundable Statement of Purpose e Our first priority is to maximize revenue for the airline Our second priority is to maximize customer service in the form of providing as much compensation to bumped passengers as is financially feasible Naive model The naive approach is to assume that since not all ticket buyers show up for the flight, we simply overbook the flight so that on average the plane fills to capacity. If on average 90% show up, we book to 100/90 capacity. However, the 90% is only an average; for some flights, more than 90% will ow up, resulting in bumped passengers and a penalty for the airline paid to bumped passengers. Since the penalty is often more than the potential revenu for one more passenger, the airline could pay more in penalties than the extra revenue received. We need a way to factor the risk of penalties into our model Risk assessment Model We maximize revenue on each individual flight leg, which we regard as independent of other flight legs. Thus, optimizing the revenue of one flight does not adversely affect potential revenue from other flights Since an airline incurs an increased penalty the longer that a bumped passen ger is delayed, an airline minimizes the penalty by transporting the passenger their destination as qu possible. Therefore, bumped usually booked on the next flight or series of flights to their destinationThings That Go Bump in the Flight 275 • Compounded overbooking takes care of itself (i.e., goes away naturally). Consistent industry-wide statistics establish a 60% to 80% load factor [Airline Transport Association 2002], resulting in naturally combating the waterfall effect of one overbooked flight causing another to be even more overbooked. • There is sufficient demand for at least someflights to warrant overbooking. • No-shows do not generate revenue. No-shows are given a refund or (if original ticket was nonrefundable) a ticket voucher. • Taxes paid by a passenger are nonrefundable. Statement of Purpose • Our first priority is to maximize revenue for the airline. • Our second priority is to maximize customer service in the form of providing as much compensation to bumped passengers as is financially feasible. Naive Model The naive approach is to assume that since not all ticket buyers show up for the flight, we simply overbook the flight so that on average the plane fills to capacity. If on average 90% show up, we book to 100/90 capacity. However, the 90% is only an average; for some flights, more than 90% will show up, resulting in bumped passengers and a penalty for the airline paid to bumped passengers. Since the penalty is often more than the potential revenue for one more passenger, the airline could pay more in penalties than the extra revenue received. We need a way to factor the risk of penalties into our model. Risk Assessment Model We maximize revenue on each individual flight leg, which we regard as independent of other flight legs. Thus, optimizing the revenue of one flight does not adversely affect potential revenue from other flights. Since an airline incurs an increased penalty the longer that a bumped passen￾ger is delayed, an airline minimizes the penalty by transporting the passenger to their destination as quickly as possible. Therefore, bumped passengers are usually booked on the next flight or series of flights to their destination