Smaller Aircraft for More Profits? A Preliminary Examination on Airlines' Fleet Size Decision with Fare and Demand Distributions

• Main Author: Fan, Terence Ping Ching
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2002
• Subjects: Air transportation; Demand; Fares; Marginal costs; Operating costs; Profits; Revenues; Small aircraft; Business Administration, Management, and Operations; Strategic Management Policy; Transportation
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2134
• Institution: Singapore Management University

At the confluence between traditional revenue-maximizing frameworks premised upon fixed aircraft seat capacity, and fleet assignment integer programming paradigms premised upon deterministic demand and uniform fares, this paper explores the use of profit-maximization as a strategic decision criterion for optimizing aircraft fleet sizing, based on fare, demand and operating cost distributions. A preliminary application indicates that the potential improvement in using operating profit as the objective function compared with using total revenue or combined operating and spill costs can be between 0.6% and 21%. In general, the profit-maximizing framework tends to recommend smaller aircraft size in view of a sharply decreasing expected marginal seat revenue profile.