Question

Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked to capacity. The airline knows from past history that an average of 25 customers (with a standard deviation of 15) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $125. If the flight is overbooked, the airline has a policy of getting the customer on the next available flight and giving the person a free round‐trip ticket on a future flight. The cost of this free round‐trip ticket averages $250. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost. By how many seats should Super Discount overbook the flight?

Answer 1

By 3 seats the Super Discount overbooks the flight.

Explanation:

Cost of under stocking = 125

Cost of overstocking = 250

Optimum Service level = (125/ (125+125))*100 = 50

Optimal Overbooking = 3.33

Hence, by 3 seats the Super Discount overbooks the flight.