KLM serves Chicago, U.S., to Prague, Czech Republic, with a single flight daily. In economy class, KLM offers one-way discounted fares at $450 and one-way full fares at $1,200. Assume that there are 295 economy-class seats on a KLM 747-400. Over a long history of observation, KLM estimates that full-fare economy-class demand is normally distributed, with a mean of 112 passengers and a standard deviation of 56, while discount demand is normally distributed, with a mean of 274 passengers and a standard deviation of 137.

a. A consultant advises KLM that it can optimize expected revenue by optimizing the booking limit. What is the optimal booking limit?

b. The airline has been setting a booking limit of 183 on discount demand, to preserve 112 seats for full-fare passengers. What is the expected revenue per flight under this policy? (Hint: use a spreadsheet to help you figure this out.)

c. What is the expected gain from using the optimal booking limit over the original booking limit?

d. Lufthansa determines to enter the market, and KLM anticipates its discount fare demand will drop to 186 passengers per flight with a standard deviation of 93. Full-fare demand is unchanged. What is the new optimal booking limit?

Answer rating: 100% (QA)

a The optimal booking limit is 154 The optimal booking limit is 154 To see this we first need to calculate the expected revenues for both full fare and discount passengers For full fare passengers the ... View the full answer