Airlines extra-baggage pricing policy using newsvendor price based model

Combination airlines transport both passengers and cargo. In most cases, the airlines use wide-body aircraft with passengers in the upper deck and their bags and cargo in the aircraft belly-hold. Typically, airlines put limits for passenger's regular bags, either two pieces with 23 kilograms each, or only one with 30 kilograms and they also offer a very limited amount for any excessive weight with high prices. Moreover, most of the previous studies have been executed to determine the limits of bag weights or quantities. In this regard, we propose a newsvendor price based model to change the airline's approach from constraining the amount of extra-baggage to use it as a profitable tool. This model is concerned with the extra-luggage as new a special cargo which means that the limit of booking extra-baggage is the belly hold capacity, not anything else. A simulation analysis has been performed to calculate the expected profit in three different scenarios with different prices and quantities. These scenarios are represented in different cases related to the aircraft capacity and the existing cargo and extra-luggage together. For the first scenario, the booked space is less than the belly-hold space. For the second scenario, the existing amounts exceed the capacity. For the third scenario, the aircraft belly-hold is fully utilized. The simulation results showed that for these three scenarios, the maximum profit can be obtained if the airline offers prices for extra-baggage that are the same as regular cargo. This proposed model opens up a new era to airlines in offering a new service with a new market share and higher profits.