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Optimal High Fare Protection Level Analysis

This document discusses operations management for a flight from Chicago to Boston by North East Airways. It provides information on the fare classes and demand patterns. It then asks two questions: 1. What is the optimal protection level for the high fare class of $800 given that demand is normally distributed with a mean of 120 and standard deviation of 50? The optimal protection level is calculated to be 135 seats. 2. What is the expected revenue if a protection level of 150 seats is chosen? The expected sales of the high fare class is calculated to be 111.6 seats, bringing expected revenue of $89,252.

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Suriti Chawla
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6 views2 pages

Optimal High Fare Protection Level Analysis

This document discusses operations management for a flight from Chicago to Boston by North East Airways. It provides information on the fare classes and demand patterns. It then asks two questions: 1. What is the optimal protection level for the high fare class of $800 given that demand is normally distributed with a mean of 120 and standard deviation of 50? The optimal protection level is calculated to be 135 seats. 2. What is the expected revenue if a protection level of 150 seats is chosen? The expected sales of the high fare class is calculated to be 111.6 seats, bringing expected revenue of $89,252.

Uploaded by

Suriti Chawla
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

OPERATIONS MGMT

Suriti Chawla
2. A newly created North East Airways (NE) flight from Chicago to Boston has 300 seats. The high fare
on the flight is $800 and the restricted/low fare is $300. There is ample demand for the low fare class
but high fare demand is random. Further, the customers who buy low fares buy their tickets well in
advance before high fare customers. Assume the demand for the high fare is normally distributed with
mean 120 and standard deviation of 50. 1. Mr. Wright is in charge of the flight booking operations and
decides to set a protection level for the high fare. What is the optimal protection level for the high
fare? 2. Suppose a protection level of 150 is chosen. What is the expected revenue from high fare
passengers?

Response:

High Fare Protection Level:

Cost of Underage= 800-300=500

Cost of Overage=300

Ratio=500/ (500+300) =0.625

Z=0.32

Optimal Protection level= 120+(0.32*50) =135 seats

Expected Revenue from high Fare passengers:

Z= (150-120)/50=0.6

L (0.6) = 0.1687

Expected Sales= 120- 50(0.1687) = 111.6

Revenue= 111.6*800 = $89,252

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