Options Contracts with Overbooking in the Air Cargo Industry

WHU - Otto Beisheim School of Management Working Paper No. 2011-PROD-2

20 Pages Posted: 13 Apr 2011  

Rolf Hellermann

affiliation not provided to SSRN

Arnd Huchzermeier

WHU - Otto Beisheim School of Management

Stefan Spinler

affiliation not provided to SSRN

Date Written: April 4, 2011

Abstract

In today’s world economy, which is marked by increasing international trade, air cargo acts as a key facilitator. However, cargo airlines continue to struggle to be profitable because of very high asset costs and substantial demand uncertainty. To improve upon this situation, we propose an options contract. Our model captures the main features of cargo trade between an airline and a freight forwarder and allows to derive an optimal reservation policy. We then go on to analyze the impact of overbooking on the profit of the cargo capacity provider. The model is subsequently applied to real-life booking data provided by a major cargo carrier. This enables us to compare current contractual arrangements with the ones proven optimal in the model. Managerial insights to be drawn conclude this study.

Keywords: Risk management, options contracts, air cargo industry, overbooking

JEL Classification: C70, E22, G13, L14, L93

Suggested Citation

Hellermann, Rolf and Huchzermeier, Arnd and Spinler, Stefan, Options Contracts with Overbooking in the Air Cargo Industry (April 4, 2011). WHU - Otto Beisheim School of Management Working Paper No. 2011-PROD-2. Available at SSRN: https://ssrn.com/abstract=1802373 or http://dx.doi.org/10.2139/ssrn.1802373

Rolf Hellermann

affiliation not provided to SSRN ( email )

Arnd Huchzermeier (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509380 (Phone)
+49-261-6509389 (Fax)

HOME PAGE: http://www.whu.edu/prod

Stefan Spinler

affiliation not provided to SSRN ( email )

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