How Does Overbooking Work? (Ask Cranky)

It’s time once again to answer a reader question. This time, the question is pretty broad, but it’s a very good one. I’ll let Nathan pick it up from here.

One thing I can’t figure out is the overbooking process, and if you could explain how and why airlines use it, and how it is profitable, I’d appreciate it. I traveled on United a few months ago, volunteered to give up my seat, and ended up receiving a voucher for $500. I understand that sometimes people don’t show up for their flights and the airlines would prefer to have seats filled, but does handing out these vouchers really make up for the empty seats? Or do they count on the fact that people either won’t use the voucher or won’t use all of it so it doesn’t actually cost them that much?

Nathan
Corvallis, OR

First of all, Nathan, you got pretty lucky. It’s not often you get a $500 voucher anymore since airlines have become much stingier. There are also fewer people getting bumped than there used to be, so congrats.

Overbooking is one of those things that people hate, but it actually provides a benefit, believe it or not. Every time an airplane takes off with an empty seat, it’s a missed opportunity. Even if airlines sell every seat, there’s a good chance that not everyone will show up. It could be due to delays or cancellations by the airline or it could be because of last minute changes and cancellations by the traveler. Either way, it’s rare for every single person who was booked to be on that airplane.

Because of this, airlines began overbooking flights realizing that not everyone would show up. Over the years, they’ve become more and more sophisticated with the way they approach this process. Many variables go into determining how much to overbook. It can include things as varied as external events that might impact behavior during a certain time period or how easy it’s expected to be to find an alternate flight if things go wrong. But no matter how sophisticated they get with these predictions, there will always be variability. For that reason, it’s impossible to get it right every time. And when they guess wrong, there are either empty seats or not enough seats. When it’s the latter, people have to be bumped.

You might think that airlines hate when they have to bump people, but that’s not really true. They hate when they have to involuntarily bump people. Let me explain.

When a flight is oversold, airlines will start asking for volunteers to take a later flight. The better the flight option, the less money the airlines will offer to incentivize people to take the offer. Most of the time, people volunteer to take a later flight and then everyone is happy.

When that happens, everyone who needed to fly got on the airplane. Those who volunteered walked away with a little extra compensation. And the airlines were able to sell an extra, expensive last minute seat or two. You may have a vision of some guy who paid $100 for his ticket getting a $500 voucher to get bumped, but those two events aren’t really connected. By overbooking by one last seat, it enabled the airline to sell one last expensive walk-up fare. On the whole, they make money even if the compensation creeps up.

Then there are the involuntary denied boardings. These are bad. If the airlines can’t get enough people to volunteer to take a later flight, they are forced to bump people against their will. Naturally, that means that there are going to be some angry people who don’t get on that airplane.

This doesn’t happen all that often. For the first nine months of 2013, airlines that report to the Department of Transportation (most of the big guys) bumped 398,346 people, only 12 percent of those were involuntary. Overall, bumping numbers are down a lot. The rate for 2013 is about half the rate that we saw 10 years earlier, during the first nine months of 2003.

Why is that happening? Well, first of all, airlines have become better at predicting these things. But also important is that the penalties for involuntarily bumping someone have gone up a lot.

Not only can the penalty now be 4 times the value of the ticket, but the cap has been raised to over $1,000 (and rising). With the potential cost going up, airlines have had to get more conservative on how much they overbook.

But that’s an issue for involuntary denied boardings. When it comes to voluntary denied boardings, it’s a different calculation. It’s not hard money going out the door but rather vouchers. And those can have a lot of breakage. Airlines that offer vouchers good for a roundtrip ticket in exchange for bumping are the ones that made off the most like bandits over the years. Those were always capacity controlled and they weren’t easy to use. That’s why dollar vouchers are much more popular with travelers.

But even those dollar vouchers don’t all get used. And when they do, they don’t necessarily use the entire amount. And you usually don’t get the keep any residual amount to use on another ticket.

In the end, when you add it all up, it means good profit for the airlines. It’s not a practice that will be discontinued unless penalties rise so much higher that it no longer makes sense.