Problem: An airline serving Denver's International Airport and Steamboat Springs, Colorado, is considering overbooking its flights to avoid flying with empty seats. For example, the ticket agent is thinking of taking seven reservations for an airlplane that has only six seats. During the pst month, the no-show experience has been:
No-shows 0 1 2 3 4
Percentage 30 25 20 15 10
The operating costs associated with each flight are pilot, $150.00; first officer, $100; fuel $30; and landing fee, $20.00.
What would be your recommendation for overbooking if a one-way ticket sells for $80 and the cost of not honoring a reservation is a free lift ticket work $50., plus a seat on the next flight?
What is the expected profit per flight for your overbooking choice?