The Case for (and most likely against) Overbooking Policies

DISCLAIMER — the thoughts and opinions expressed in this article are mine and mine alone.

What is Overbooking?

  • Selling more tickets than there are seats.

Why?

  • Cancellations = empty seats
  • Empty seats = lost revenue
  • Airliners’ options?
  • Don’t allow cancellations
  • Raise prices to offset risk of cancellations
  • Airlines choose both!
  • For planned trips that are less likely to cancel (leisure), they have a lower price (because less risk) with a no cancellation policy (additionally lowering risk)
  • For trips more predisposed to cancellations (business), they have a higher price to offset the risk of cancellations.
  • Great, risk mitigated.

But Wait, There’s More

  • Leisure travelers have things come up and some % still cancel
  • Business travelers plans change and still adjust their flights
  • So, if seats are empty, resell them!
  • Sounds good on paper, but it is often hard to fill seats at the last minute without dropping prices substantially. Moreover, doing so encourages travelers to wait for last minute deals, hurting the bottom line and the business model.
  • So what next?

Introducing Overbooking

  • What is overbooking?
  • Selling more tickets than there are seats.
  • 100 seats on the plane, oversell by 10% or by 10 seats.
  • How much should an airline overbook?
  • Surprisingly, for each corridor (origin-destination pair), cancellation rates tend to be easy to model and predict for both the leisure and business side.
  • If airlines overbook based on these predictions, they will generally be flying with more butts in seats with a total seats sold more than the plane even supports. That is a pretty big win.
  • In general, overbooking is what allows for lower rates and more flexible fares. Plus, if you are the type of person that doesn’t cancel, then you may have bought a seat that would otherwise have been unavailable.

Where Problems Arise

  • Models estimate (forecast) number of cancellations
  • These models are pretty accurate over time, but are generally a little bit off day-to-day.
  • If cancellations are lower than usual, someone doesn’t have a seat.
  • If cancellations are higher than usual, the airline loses money

How Airlines Deal with Missed Estimates

  • Airlines still don’t like the idea that a seat could be empty, so they would rather miss by overbooking instead of underbooking.
  • That means asking a passenger to change routes or wait for the next plane is the typical approach.
  • When an airline (or hotel for that matter) “walks a guest”, they will often book them on another airline, change the route to a longer route or have them wait.
  • To “alleviate” the inconvenience (and let’s be honest, pure pain) for the traveller, they will reimburse them.

Reimbursement V1 — Full Price Refund

  • The “MVP” approach is simple — if you oversold your flight, offer to refund the cheapest passenger’(s’) tickets or offer them a credit.
  • With this method, to some extent, everyone wins — the airline booked all the seats on the plane, the next flights will have reallocated passengers who also walk away with some cash.
  • As long as you didn’t overbook all of your flights (and you have as many overbooked as under booked), then this doesn’t create any issues.

Reimbursement V2 — Elasticity of Supply

  • Airliners discovered that it was relatively easy to get passengers to volunteer to give up seats.
  • If 4 suppliers of seats (travellers) are willing to meet the demand of 1 seat (from the airline to allocate to someone else), then supply and demand in this spot market are not equal.
  • When there is more supply than demand, prices go down.
  • Airlines then start to model the price elasticity of supply, looking for the seated-traveller that is willing to give up their seat for the lowest amount of money.
  • This greatly benefits airliners that now are paying less to “buy-back” the seat from the traveler than the original amount the traveller paid. That traveller, however, is still receiving additional utility via the refund, so to some extent, it is still a win-win.

The Fine Print

  • Credit isn’t cash
  • Many (not all) airlines realized that if they give a credit, that they do not, in fact, lose the revenue, they displace it to another date.
  • What’s worse, is that the “fare class” of a reimbursement often limits the routes, dates and seasons you can travel in.
  • How are those policies defined? Simple, they allow you to fly in seasons and corridors that they know have very little probability of being full (so you aren’t cannibalizing other revenues).
  • Expiration
  • Most credits expire
  • If you traveled for work, your company paid for it and it’s pretty unlikely you will need the credits
  • If you traveled for leisure, odds are you took off work for your vacation and may not be able to do so again before the expiration date of your voucher.
  • Just like the gift card industry (that is worth billions), a lot of airlines bet on people not using their credit.
  • Amount matching
  • You may get a $300 credit, but all interesting routes may cost $500. This forces you to become a loyal customer that actually is now taking an additional trip (maybe before you planned to in order to use your voucher), but you are having to pay additional money. This is net revenue positive for the airline.
  • If your desired flight is $200 and you have a $300 voucher, there will be $100 left that you might not be able to use anywhere, and that amount may just expire.
  • What’s worse is that many vouchers have fine print that denotes that you can ONLY use the voucher on one trip, not across multiple trips (or even sometimes multiple flights within one trip).
  • What’s the effect of that?
  • Travelers are FORCED to either leave “money” on the table or pay additional money for an unplanned additional flight.
  • Involuntary Denial
  • When it gets down to the nitty gritty scenario where no one will give up their seat, the airline must forcibly deny travelers. Ouch.
  • Which travelers get denied? Generally, not the ones already on the plane — that gets messy (see United).
  • The travelers that get denied are ones that have yet to board the plane. Yeah, now it makes more sense of why they board the most expensive ticket classes first.

Tips

  • Check in the night before or as early as possible and print your boarding pass.
  • Get to the airport early
  • Go through security early
  • Cut in line when they are boarding to get a seat
  • Do NOT consider taking a voucher unless you have already read the fine print and are okay with the terms
  • If no one is raising their hand, negotiate. Management has the ability to negotiate the amount (even if they say they don’t).
  • If you get forcibly denied, complain. The squeaky wheel gets the grease.