Air cargo capacity allocation : solutions for demand imbalance between different routes

Abstract

In the air cargo industry, the relationship between market demand and route capacity is complicated. The market demand is commonly uncertain, whereas the capacity of routes is either uncertain or fixed. This causes various gaps between the demand and capacities of routes, i.e., the freight forwarders demand in certain route may either exceed the fixed capacity of airline (hot-selling routes) or the demand is much less than the capacity of other routes, (underutilized routes). This research tackles the imbalance problem between hot-selling and underutilized routes. On this subject, three capacity allocation models are developed to solve the demand imbalance problem. Due to the continuous growth of the demand of passengers, an extensive use of wide-body aircraft leaves large spaces in the aircraft belly-hold, and thus, some cargo routes become overcapacity. In this vein, underutilized routes are the first topic in this research. This topic is tackled by two objectives. First, filling up the unused space in underutilized routes by proposing the extra-baggage scheme to exploit the increase of passengers. Second, setting the price of the proposed scheme. As the scheme is new, the price is set with reference to the price of the cargo. The multi-item newsvendor model is employed to derive a close-form price formula for the extra-baggage scheme in reference to market price of cargo. The model is formulated with stochastic extra-baggage-deterministic cargo demands. The results revealed that the extra-baggage price is very high because of the cargo penalties. To cancel the effect of the cargo penalties, the deterministic cargo demand is modified to the stochastic form which gives more realistic prices for the extra-baggage. Moreover, the modified model gives the airline the opportunity to switch between two different pricing strategies either market penetration or pure premium strategy. Moreover, a comparison between the existing excess baggage and the proposed extra-baggage service is conducted. It is found that the extra-baggage profit oversteps the excess baggage profit by 25 percent. However, the above model does not tackle the imbalance problem directly. It does not include the interrelationship between hot-selling and underutilized routes. So, the second model is proposed to combine a hot-selling route with an underutilized route. A Puppet-Cournot game model is developed to estimate the best quantity combination. In this game, the airline controls the game between the two routes. Also, it captures different quantity scenarios in the form of the best response for each route compared to the other. Then, the Puppet-Cournot game is integrated with the quantity discount policy to motivate freight forwarders to increase their orders in the underutilized route. By performing numerical experiments, the results reveal that the quantity discount boosts the profit of the hot-selling route and decreases the profit of the underutilized route. Moreover, it is concluded that the quantity discount model is only applicable when the profit increase in the hot-selling route is greater than the profit decrease in the underutilized route. Eventually, a sequential cooperative game is performed between the airline and freight forwarders in which they agree that airline assigns an amount in the underutilized routes proportional to the forwarder's order from the hot-selling routes. In this game, the payoffs are the expected profit from using a mixed-wholesale-option contract between the airline and freight forwarders. The mixed contract takes advantage of airline power in selling the hot-selling routes at the wholesale price and gives advantage to forwarders by opting for option prices of underutilized routes. The model solution shows that the demand in the underutilized routes follows self-replicating distributions. Also, the mixed wholesale-option model is compared with the pure wholesale and pure option-contract models. The results reveal that the mixed model provides the highest allocations in the underutilized routes, leading to a better demand balance among the substitutable routes.