A Note on Air-Cargo Capacity Contracts

Carriers (airlines) use medium-term contracts to allot bulk cargo capacity to forwarders who deliver consolidated loads for each flight in the contractual period (season). Carriers also sell capacity to direct-ship customers on each flight. We study capacity contracts between a carrier and a forwarder when certain parameters such as the forwarder’s demand, operating cost to the carrier, margin, and reservation profit are its private information. We propose contracts in which the forwarder pays a lump sum in exchange for a guaranteed capacity allotment and receives a refund for each unit of unused capacity according to a pre-announced refund rate. We obtain an upper bound on the informational rent paid by the carrier for a menu of arbitrary allotments and identify conditions under which it can eliminate the informational rent and induce the forwarder to choose the overall optimal capacity allotment (i.e. one that maximizes the combined profits of the carrier and the forwarder).