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To a large extent, the air cargo market is a B2B service market between air cargo carriers and forwarding companies. Sellers strive to mitigate risk by engaging in advance sale of capacity via long-term contracts. However, these contracts often leave buyers with an incentive to default if unforeseen price and demand movements occur.
This book proposes capacity options as an alternative contract type which provides the desired flexibility, and illustrates how capacity can be priced through option contracts. The analysis is accomplished by means of an analytical multivariate optimization model under price and demand uncertainty. An application case study conducted on the basis of empirical data from a leading German air cargo carrier illustrates the financial potential. Finally, the author shows how capacity-option contracts integrate into the context of air cargo revenue management.
Content Level »Professional/practitioner
Keywords »Advance Sale of Capacity - Real Options - Revenue Management - Supply Contracts - distribution - optimization
Capacity Agreements in the Air Cargo Industry.- Literature Review on Supply Contracting and Revenue Management.- Capacity-Option Pricing Model.- Model Results and Comparative Statics.- Model Extensions: Distribution of Profits, Correlations, and Overbooking.- Application Case Study in the Air Cargo Industry.- Managerial Implications and Conclusion.