Linear approximation approach for a stochastic seat allocation problem with cancellation & refund policy in airlines

This study is focused on the seat allocation problem with stochastic demands airlines to determine booking limits by fare classes in airlines. In this paper, we consider the additional constraints such as customers’ booking cancellations and airlines’ refund policy. Our problem can be modeled as a probabilistic non-linear programming model, which is difficult to solve optimally. Applying a linear approximation technique with some assumptions on the demand distribution functions, we can formulate the complex probabilistic non-linear programming model as a simple Integer Linear Programming model. Using randomly generated demands from a simulation program, the model demonstrates that revenue can be increased in a practical and effective manner.