Theoretical formulation and demand parameters optimization for a proposed extra-baggage service

At present, over 3000 airlines across the globe compete with one another in order to attract passengers and cargo forwarders by offering competitive prices. In recent years, airlines have encountered two major problems: the fluctuation in the freight industry and the cargo capacity imbalance on different routes. Further, as anticipated by the International Air Transport Association (IATA), the use of wide-body aircraft will increase to accommodate the increase in passengers. This will lead to an underutilized aircraft belly hold on some routes; a change which dramatically complicates the estimation of aircraft space utilization and pricing strategies. To compensate for this unfilled space, airlines are encouraged to offer more space for passengers' extra-baggage with a new pricing policy, besides the prepaid baggage allowance. Accordingly, we have formulated a newsvendor based price model to set a new pricing policy for the new service. The model compares the expected profit from traditional cargo allocation with the expected profit of combining cargo and extrabaggage. As the demand is a function of price, the function coefficients values are important factors in computing the extra-baggage price within acceptable ranges. In this manner, we adopted the Taguchi approach to design suitable demand function coefficients. It is concluded that the slope of cargo demand function is the most effective factor in calculating the extra-baggage prices.