Analysis of airline operating strategies under stochastic demand

Variability in the demand for air travel is studied with respect to stochastic and time varying components which affect the distribution of passengers who will want to travel on a particular day. The problem is then cast as one of optimizing the total capacity offered in a given time period using operating net revenues as the objective. The distribution of demand is assumed to be normal, and passengers lost on those days when demand is high are assumed to travel on another airline or a different mode. An airline must therefore balance the costs of increased capacity against the benefits of carrying more people. Tradeoffs are studied parametrically, with particular emphasis on the effect the variance of the distribution of demand has on different relationships. Also shown is a simple procedure for estimating actual market mean and variance given the mean and variance of the number of passengers actually flown, which has a truncated distribution.