An option-based capacity control mechanism for code-sharing alliances

Abstract

This study addresses capacity control problems in code-sharing alliances, which deal with the determination of member airlines' booking limits. We propose an innovative option-based capacity control mechanism to overcome the drawback of inflexibility in blocked seat allotment for a two-airline code-sharing alliance. The mechanism incorporates the concept of a straddle, an advanced option strategy in finance, to allow member airlines the flexibility to tackle not only downward but also upward demand variations during the booking process. We design simulation experiments and use a case illustration to show scenarios when the code-sharing alliance can benefit from the proposed mechanism.