Optimal Airline Booking Control with Cancellations

In airline revenue management, cancellations refer to returns or changes of booked seats prior to flight departures, and no-shows refer to passengers that do not check in without notifying the airline in advance. Cancellations and no-shows present a major barrier to effective seat inventory control systems. While cancelled seats can be rebooked in the future, no-shows lead to ultimate vacancies. According to Smith et al. (1992), customers cancel more than 50 percent of their booking requests before or at departures. To curtail potential revenue losses resulting from cancellations and no-shows, airlines commonly adopt overbooking policies. Smith et al. (1992) reported that without overbooking, 15 percent of seats would be spoiled. However, overbooking also runs a risk of over-sold if seat capacity is exceeded at departure. Hence, a good overbooking policy should strike a balance between the opportunity cost of vacant seats and the penalty of not honoring passengers with reservations.