Optimal strategies using financial options in airline booking

Maximizing airline profit is challenging as several costs, such as fuel or manpower, have been increasing. Fierce competition has forced airlines to drastically reconsider their economic policy. Traditional revenue management techniques such as overbooking or dynamic pricing have been utilized to improve profit of the airline industry. Yet, market finance and its dynamic fast-pace modeling inspire a different approach to airline revenue maximization. This work proves the efficiency of using financial options theory, considering only two standard types of options (call options and put options). The demand distribution and the random walk of a ticket price cause uncertainty in the booking process. A numerical search method is used to determine the optimal values for the decisions variables for a given distribution of demand. A numerical example is presented and sensitivity analysis is performed to test the behavior of the model when changing input parameters (skewness of demand distribution and up and down moves of the ticket price), and it demonstrates the importance of accurate forecasting of demand and the precise estimation of the random walk parameters.