Tying mechanism for airlines' air cargo capacity allocation

Airlines commonly experience the problem that the sum of freight forwarders' orders exceeds the airline's fixed capacity for hot-selling routes, while the orders are usually <50 percent for underutilized routes. Airlines cannot dynamically change flights to address the imbalance, since they have to serve passenger traffic when carrying cargo in the belly space of passenger flights. The imbalance problem is likely to become even more severe when the number of wide-body passenger aircraft increases in the near future, as expected by the International Air Transport Association (IATA). Motivated by a joint project with a large airline, we propose a tying mechanism for capacity allocation by integrating hot-selling routes and underutilized routes. The strategic foreclosure theory is adopted in the proposed mechanism. Some forwarders are selected as the partners to whom more capacity of hot-selling routes are allocated with the condition that they will order more underutilized routes. Other “excluded” forwarders temporarily operate underutilized routes. By observing the cost structure information of forwarders, we design the tying mechanism for air cargo capacity allocation and derive the closed-form optimal solution. Using data from the airline, we demonstrate that the proposed tying capacity allocation mechanism is very effective.