Air cargo overbooking model with stochastic capacity and penalty cost under CVaR framework

Abstract

Overbooking has been studied intensively. However, those studies have paid little attention to the effect of penalty cost and degree of airlines' risk aversion on the decision-making. A cost model like a newsboy model is presented for optimal overbooking level of air cargo with stochastic capacity and penalty cost. Then the overbooking model of air cargo was proposed under the Conditional value-at-risk (CVaR) framework. The analytical results show the optimal overbooking level is monotonically decreasing about penalty cost regardless of the airfreight carriers' risk preferences. In contrast, the optimal overbooking level of risk-averse airfreight carriers depends on demand distribution and the degree of risk aversion, which may not be less than that of risk-neutral airfreight carriers.