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Dynamic Overbooking
Overbooking is a strategy to intentionally accept more booking reservations than the
physical capacity of a resource, mainly as an attempt to reduce revenue losses from
no-shows or cancellations while taking into account risk of denying service. An
overbooking strategy can be considered in any business context where capacity to
supply products or services is limited, be it seats in an airline compartment, available
rooms of a given type in a hotel or cars available for rent at a certain car rental location.
For ease of presentation, in this white paper we explain all overbooking strategies in
the airline context.
Almost all airlines today manage their overbooking in a "static" manner, which is
popular in practice mainly due to its simplicity, flexibility and robustness. With a static
overbooking method, once the decision regarding how many seats to overbook is
made, the overbooking level is assumed not to change.
In real life, however, the overbooking level should change. For example, if the
estimated no-show rate changes or available capacity changes. This typically happens
during a re-optimization.
At PROS, we have conducted research on methods that explicitly account for the time
dynamics of arrivals and cancellations, as well as seat control, and dynamically make
overbooking decisions based on the inventory left and time to departure. We have also
demonstrated, through abundant simulations, a consistent revenue benefit that
dynamic models have over static models, and we firmly believe that the dynamic
models should no longer be overlooked by practitioners.
www.pros.com
Summary
