We integrate for the first time, to our knowledge, a dynamic transit assignment model into the tactical planning phase. The settings of service frequencies and vehicle capacities determine line capacity and have significant consequences for level-of-service and operational costs. The objective of this study is to determine frequency and vehicle capacity at the network level while accounting for the impact of service variations on users and operator costs. To this end, we propose a simulation-based optimization approach. The proposed model allows accounting for variations in service headways and crowding as well as their consequences for passenger flows distribution, all of which have not been accounted for in the tactical planning so far. Practical benefits of the model are demonstrated by an application to a bus network in the Amsterdam metropolitan area. This study contributes to the development of a new generation of methods that integrate reliability into the tactical planning phase to improve service quality.