The effect of buy-back policy in air cargo revenue management

In order to hedge against demand fluctuation after an intermediary has booked cargo space from an asset provider, buy-back policy has been applied in revenue management. This practice allows both the asset provider and the intermediary to buy back or sell reserved capacity options. This study seeks to apply the financial buy-back concept into the logistics domain by incorporating the Hellermann´s capacity option model into the Black-Scholes pricing model. The proposed model was verified by practical air cargo booking data. The experiment results showed that the buy-back policy is capable of increasing the revenues from both the aspects of asset provider and intermediary. The developed model serves as a potential framework for the air cargo participants to handle their booking capacity during the period of order release and order execution.