Price setting for extra-baggage service for a combination carrier using the newsvendor setup

Abstract

Wide-body aircraft are frequently used to meet upsurges in passenger demand, resulting in the underutilization of the belly-hold capacity on many routes. In the existing literature, investigating this specific underutilization problem has not received much attention from scholars in this field. Therefore, in this paper, we study this problem with two main objectives. First, to propose an Extra-baggage service as a solution to the underutilization problem. Second, to provide the associated prices for the proposed extra-baggage service. For this purpose, we adopt the newsvendor-based pricing model that explores different prices, while combining different amounts of extra-baggage and cargo in the belly-hold space. To demonstrate the potential and feasibility of the proposed service, a numerical simulation has been performed. The simulation includes comparing the expected profit from cargo allocation with the expected profit from the allocation of a combination cargo with Extra-baggage. The simulation results show a significant profit improvement for the airlines, while using the Extra-baggage scheme. This is apparent as the profit increases by 25% over the current excess baggage scheme. Moreover, the results show a double profit improvement in various seasons. This performance echoes the importance of the extra-baggage service being implemented in real practice.