Using financial options in airline booking process

This paper investigates the potential of using the financial options as a means of managing the ticket sales in an airline booking process. Call options are used to recall the tickets already sold, whereas put options are exercised to sell low-fare tickets in the last booking period whichever is favourable to the airline. By utilising the proposed approach, airlines can prevent the inherent drawback of overbooking, customer dissatisfaction due to denied boarding that occurs when the demand is higher than the flight capacity. Moreover, the proposed options approach can decrease the probability of a flight departing with vacant seats when the demand is lower than the capacity with consequent improvements in revenue for an airline company. In the paper, a mathematical model is introduced and a simulation study is conducted to explore the effectiveness and the potentials of the financial options in airline reservation systems for revenue improvement. Results obtained from the simulation study suggest that adoption of financial options creates significantly higher revenues in comparison to those by the traditional overbooking-based revenue management (RM) approach. It can be further conjectured that adoption and utilisation of the financial options in an airline booking process will reveal a seat’s true economic value in the long term. One potential and immediate application area of the suggested RM approach is the Internet-based booking and bidding systems.