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We all know of the horror stories of someone being denied boarding from a flight when they have a ticket for that flight. Sometimes this gets violent, like in the famous United Airline’s case with Dr. Dao. There are also cases of airlines offering huge amounts of compensation to entice passengers to take a later flight. It makes many passengers wonder why airlines would ever sell more tickets than there are seats on the airplane. This “overbooking” practice has caught the eyes of Congress, too.

Yet overbooking is widely misunderstood. People often confuse overbooking with denied boarding, and yet the two are are only somewhat related. Many passengers enjoy the low fares available because of overbooking, and the odds of being denied a seat as the result of overbooking are exceedingly small. Understanding overbooking and how this affects airline passengers reveals the practice as not only logical, but desired:

Why Overbook At All

This is simple. Aircraft have a fixed number of seats, and once the flight takes off that seat “spoils” and can no longer be sold. Every ticket sold is not a guarantee that the passenger will actually show up. People no-show for a lot of reasons. They could arrive late, get caught in the bar and hear the wrong “last call” announcement, or be caught in the security lane. They could also do everything right but be on a flight that is delayed, and when it arrives at a hub their connecting flight has already departed. Those passengers were no-shows for the connecting flight even though it was not their fault.

Let’s say that every booking has a 99% chance of being at the gate on time. On a 150-seat plane, assuming each booking is independent of the others, that means there is a .99150, or a 22% chance of everyone showing up. Of course the 99% is made up, but the point is that the industry knows people don’t show up all the time, so the probability of each booking becoming a passenger at the gate is not one. Without overbooking, the airline would have more empty seats and everyone would need to pay a higher fare to cover the empty seat costs.

Two Errors Of Overbooking

Overbooking can cause two errors, even though people see only only one of them. If too many tickets are sold, and even after the no-shows there are more people than seats, then the flight is considered oversold. Oversold is not the same as overbooked. It is the mistake that can happen when the flight is excessively overbooked. When a flight is oversold, some passengers have to volunteer to take a later flight in exchange for some compensation, or passengers with valid tickets will be denied boarding. Oversold flights can create media events and are often stressful times for passengers and airport agents.

But what if the airline doesn’t overbook at all, or not enough? Then the airline takes off with empty seats that could have been sold. This is called spoilage, and even though this cost does not show up in accounting statements it is a very real economic cost to the airline. This lowers the airline’s unit revenue but doesn’t change the airline’s cost. This means that with high spoilage, which happens with little or no overbooking, every passenger must pay higher fares to cover that spoilage cost.

Denied Boardings Happen Without Overbooking

Passengers can be denied boarding because of overbooking. But they can be denied boarding for reasons not related to overbooking. In the infamous Dr. Dao case, media and legislators screamed about overbooking but the flight was not oversold. Four pilots needed to board the flight to fly a flight at the destination, and their priority resulted in the airline needing to get people off the plane to make room. A lot went wrong on that flight, but overbooking wasn’t the reason it happened and stopping overbooking doesn’t ensure it won’t happen again.

Denied boardings can happen when the airline’s operation must use a smaller replacement airplane. Say a 150-seat plane is scheduled to operate a route, and the airline books to create 148 people at the gate. This would normally be considered an excellent result. But if that plane has a mechanical problem that will take time to fix, the airline may pull up a 120-seat plane to operate the flight. Now, there are 28 people with tickets that won’t fit on the new plane, and this too was not related to overbooking.

No airlines want denied boardings and they train airport workers on these situations. Not overbooking does not eliminate denied boardings, so customers are better helped by overbooking done correctly.

The Consumer Cost Of No Overbooking

There is a major consumer cost when airlines do not overbook. As explained earlier, this is higher fares paid by all to cover the empty, spoiled seats. It’s worse than this, in that it hurts those who can least afford to pay. That’s because during the sales cycle of a flight, the airline will stop selling the cheapest seats more quickly and still keep room for higher-priced tickets.

Calls to stop overbooking are seeing less than half of the issues. People don’t want forceable denied boardings, and neither do airlines. Delta Airlines is very effective at getting customers to willing give up their seat on the few flights that need this. In 2022, the last full year with available data, Delta had zero involuntary denied boardings. They are one of the largest airlines in the world, and they have figured out how to do this very well. At the other end, Frontier involuntarily denied 2.66 passengers per 10,000. They have some work to do.

How Airlines Can Be Better At Overbooking

Most airlines can be better at overbooking. There are several techniques that can help this, including reducing the overbooking rate throughout the day. That’s because later in the day, there are fewer options to protect denied passengers and get them there on the same day. The passenger make-up on the flight matters, too. At Spirit Airlines, we saw a higher than average no-show rate on very low fares (under $10). It’s almost as if customers saw this as an option, rather than an obligation, to take the flight. Similarly, very high-priced tickets with full change and refund flexibility also tend to have higher no-show rates.

Beyond making these kind of decisions, what every airline can do is to update their costs of spoilage and denied boarding in their optimization models. These models work by assuming a cost for these errors, and try to set booking levels to maximize net revenue (revenue after paying any overbooking costs). These costs, at many airlines, probably haven’t been updated for years. Today’s post-pandemic world has likely changed the value of a spoiled seat, and the cost of denied boarding now should include risks of negative media and future regulation risk. Just making this small change will make every airline more efficient at overbooking. And overbooking done right helps all customers, by keeping fares low, offering more low fares, and as Delta has shown this can work without forcibly removing people from a flight.

Source: https://www.forbes.com/sites/benbaldanza/2023/06/02/overbooking-airline-seats-helps-everyone-when-done-correctly/