Air North's flight from Delhi to Chennai has a capacity of 150 people.
Airlines are allowed to sell more
tickets than there are seats on a flight because not all passengers (who have bought tickets) show up
at the airport. Air North has sold 250 non-refundable tickets for the flight at a price of Rs. 4500 per
ticket. The fixed cost of flying the concerned aircraft from Delhi to Chennai is Rs 3,50,000. The variable
cost of flying a single passenger on that aircraft on the same route is Rs. 1,000.
If passengers more than the flight capacity show up, all of them cannot be accommodated in the flight.
In such a situation, Air North can exercise any one of the following two Compensation Options. First,
they can pay an overbooking compensation of Rs. 6,000 to each passenger who showed up but could
not be accommodated. Second, they make arrangements for sending these passengers using the flight
operated by one of its competitors, Air South. However, the cost for this arrangement would depend
on the number of such tickets that Air North would buy. Ticket price details can be found in Table 1.
For example, if Air North purchases 200 tickets, it would pay Rs. 6500 each for first 50 tickets, Rs. 5500
each for next 100 tickets, and Rs. 5000 each for the rest 50 tickets. Air North decides between first and
the second option with the objective of maximizing its profit.
Table 1: Air South Ticket Price Details
Range of Tickets Price per
Ticket (Air
Floor Ceiling South)
1 50 6500
51 150 5500
151 300 5000
301 Unlimited 4500
1. Develop a model to compute Air North' profit if 225 passengers (out of 250 who purchased the
tickets) show up for the flight. While developing the model, please keep in mind the modelling good
practices.
2. How would different combinations of tickets sold and passengers showing up at the airport influence
the optimal Compensation Option choice?
3. Using the most appropriate approach, report Applicable Cost under First Compensation Option,
Applicable Cost under Second Compensation Option, optimal choice of Compensation Option, and
Final Profit values for Air North in scenarios provided in the Table 2. Applicable Cost calculation
should include fixed cost, variable cost, and cost to compensate passengers (either through
overbooking compensation or through Air South tickets). Final profit calculation would reflect the
optimal choice between first and second options.
Table 2: Scenario Details
Scenario 1 Scenario 2 Scenario 3
Tickets Sold 250 300 200
No of Passengers Showing Up 125 275 175
Flight Capacity 150 150 200