Overbooking 101

I’ve read a few outraged articles about United Airlines vs Dr Dao. As he often does, James Pilant questions the business ethics involved. I consider air travel an environmental tragedy, and agree that people wearing police uniforms are entirely too ready to dish out force and violence, but I have been generally aware (one of my brothers has been bumped) that overbooking was a common practice driven by A – people missing or not showing up for flights, or taking earlier flights and B – the airlines wanting to maximize profit by having a passenger in every seat.

I read somewhere that without overbooking the average flight might be only about 83% full, but I have seen many more empty seats on Greyhound. I’ve taken the bus from Altoona to Harrisburg to Baltimore dozens of times, and unless it is a holiday weekend, I see anywhere from 50 to 90% of seats going empty. Airlines, though, were hit hard by the price-gouging competition that came with the 1978 Airline Deregulation Act, and more recently by unpredictable fuel costs. So they overbook. As I am in the middle of reading James Kwak’s Economism: Bad Economics and the Rise of Inequality, I was trying to figure out why, in a deregulated and free market, overbooking isn’t perfectly balanced by some other market factor like voucher payments.

On April 11th, Cadie Thompson at Business Insider explained, The frustrating reason airlines overbook flights, but quoted Vinay Bhaskara, “Usually, they won’t overbook first class because that could tend to make your most lucrative passengers very angry.”

Four days later Thompson amplified the justifications, Here’s why overbooking flights is actually a good thing:

“By overbooking it actually does help keep the fares down because the airlines are able to maximize the amount of revenue they are able to collect and generate as much profit as they can,” said Henry Harteveldt, president and travel industry analyst for Atmosphere Research Group, told Business Insider.

“But if they didn’t overbook it’s possible they may have to charge more,” he said.

Overbooking is also beneficial to consumers because it allows the more flexibility in their travel plans, Vinay Bhaskara, Airways senior business analyst, told to Business Insider.

“Frequently, the people who benefit the most from overbooking are the last few people to buy, The ones who are not able to make plans in advance,” Bhaskara said. “Often times those seats are available at the last minute are only available because that flight can be overbooked. The airline knows some people are going to be missing the flight.”

Ultimately, though, overbooking is done because airlines want to ensure that they are making the most money on every seat. So they use historical data to help them predict how many people will likely miss a flight on a certain route. And most of the time it works.

Bureau of Transportation Statistics indicate that in 2015 about one-tenth of a percent of passengers were denied boarding (bumped), and that roughly 90% of those were voluntary, meaning that they took the vouchers offered. Journalist Bob Sullivan notes that while the voluntary numbers are declining, the involuntary bumps remain fairly constant. He blames the vouchers:

Again, that means one thing: the voucher offers aren’t nearly good enough.

Let’s speculate about why that is.  I’ve heard from many readers today about the vouchers they get from airlines in this situation, and here’s the truth: Experienced fliers are wise to the game. They are saying no more often.  Vouchers aren’t all they are cracked up to be, and they certainly aren’t the same as cash.  They expire.  Sometimes their remaining value is surrendered (a $400 voucher gets a $300 flight and $100 disappears).  Most of all, the vouchers must be used on the airline that just did the bumping. Who wants to fly an airline that just kicked them off a plane!

And, like rebates, some of them are never used, giving the airlines a secret source of revenue.

Kwak’s central theme is that the free market only operates perfectly inside your Economics 101 class:

“… Because nobody is ever forced to make a trade (in theory, at least), a transaction only occurs if it makes both parties better off. … prices naturally adjust until supply equals demand. …”

Kwak notes that in the real world, there is, “a fundamental tension between efficiency and fairness,” which sometimes leads to price gouging, and now has led to a bloodied man being dragged off a passenger jetliner, and being vilified in the press for not going quietly.

Update 20170420, a popular article at The American Conservative quotes Fox, The Daily Mail and the Independent to paint Dao as a sharpie who instigated the whole mess, hoping for a lawsuit.

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