Using financial options in airline booking process Ali Akgunduz  , Banu Turkmen and Akif A. Bulgak Received (in revised form): 5th February, 2007  Department of Mechanical and Industrial Engineering, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec, Canada E-mail: akgunduz@encs.concordia.ca Ali Akgunduz is an assistant professor at the Department of Mechanical and Industrial Engineering at Concordia University in Montreal, Canada. Prior to joining the faculty, he worked as an Analyst-R&D at the Information System Division of United Airlines in Chicago. He earned his doctorate in 2001 from University of Illinois at Chicago in Industrial Engineering and Operational Research, his MBA in 1996 from Illinois Institute of Technology and his BSc in 1992 from Gazi University in Ankara, Turkey in Industrial Engineering. At Concordia University, he teaches courses in facilities design, system simulation, and probability and statistics. Dr. Akgunduz’s current research interests include airline revenue management, customer-driven system and product design and Collaborative design reviews. He is a registered professional engineer at Professional Engineers Ontario. Banu Turkmen is pursuing her PhD degree at Concordia University in Montreal, Canada. She received her BSc in Industrial Engineering at Middle East Technical University, Turkey. Previous positions include industrial engineer at Turkish Air Forces and quality manager in automotive industry. Her research interests include airline revenue management, financial options, overbooking and simulation. Akif A. Bulgak is an associate professor at the Department of Mechanical and Industrial En- gineering at Concordia University in Montreal, Canada. He obtained his BSc degree from Istanbul Technical University in 1982 in Me- chanical/Industrial Engineering and his MSc and PhD degrees in 1985 and 1989 from the University of Wisconsin-Madison, USA, all in industrial engineering. His research areas include Modeling, Performance Evalua- tion, Design Optimization, and Economics of Flexible Manufacturing/Assembly Systems, Stochastic Optimization, and Revenue Man- agement. He is a registered professional engineer at Professional Engineers Ontario. ABSTRACT KEYWORDS: airline revenue management, financial options, overbooking This paper investigates the potential of using the financial options as a means of managing the ticket sales in an airline booking process. Call options are used to recall the tickets already sold, whereas put options are exercised to sell low-fare tickets in the last booking period whichever is favourable to the airline. By utilising the proposed approach, airlines can prevent the inherent drawback of overbooking, customer dissatisfaction due to denied boarding that occurs when the demand is higher than the flight capacity. Moreover, the proposed options approach can decrease the probability of a flight departing with vacant seats when the demand is lower than the capacity with consequent improvements in revenue for an airline company. In the paper, a mathematical model is introduced and a simulation study is www.palgrave-journals.com/rpm & 2007 Palgrave Macmillan Ltd, 1476-6930 $30.00 Vol. 6, 2 135–150 Journal of Revenue and Pricing Management 135