Bloomberg published an article yesterday about a little test United is said to be running that will pay people to give up a seat on a flight several days in advance. If you just read the top of the article, you’d think this was about overbooking, but it’s not. (That’s just a buzzword that probably gets clicks.) This is really about revenue opportunities that don’t harm the customer experience. Whether this is a big enough opportunity for United to bother with is hard to say, but it’s worth talking about the concept.
The basic premise is simple. If United has a flight that’s sold out well before departure, this system would look for opportunities to offer vouchers to people to get them to switch to another flight. The process would start 5 days out, so this is well before anyone would get to the airport. If that happens, United could then re-sell those seats at a higher fare.
Though United gave me a short statement yesterday that would lead you to believe this about overbooking…
We are always looking at new ways to innovate and improve the customer experience and this extremely small test is an example of one of many opportunities we are reviewing. United has already taken steps to reduce overbooking, resulting in a nearly 90 percent year over year reduction of involuntary denied boardings for the month of June.
…I disagree. I actually agree with Dave Bartels, vice president pricing and revenue management for United, who said in the article that this isn’t really about overbooking.
If United were using this to reduce the level of overbooking, then it would effectively be admitting that its systems are incapable of accurately predicting by how much flights should be oversold. While President Scott Kirby has had plenty to say about United’s revenue management capabilities since he got there, he’s not going to rely on a patch like this to help fix the mess. He’s going to fix the root of the problem and make sure the revenue management system is doing its job well. The focus should be (and undoubtedly is) on finding the right algorithm to ensure that United is setting authorization levels (the number of tickets it sells on any given flight) appropriately.
Thanks to variability, it won’t be right on every flight, of course, and that’s why people are denied boarding. But if your system is running right, you don’t want to pay someone to change flights 5 days in advance of travel. You want to bet that through no-shows, missed connections, changes, and volunteers, your flights will go out with just the right number of people. (That’s why you decided to sell that many seats in the first place.) United should use a mechanism on the day of travel to get more volunteers if it finds itself in trouble then. It does that, and it’s developing more ways to handle that better… but that’s not what this tool is for. For this tool, let’s look at a simple example.
Let’s say you have 150 seats on a flight and your system determines that the right number of seats to sell considering no-shows, changes, etc. ends up being 160. Great. Now you historically expect to be able to sell 25 full fare tickets, 100 regular fare tickets, and 35 super-cheapo-fare tickets.
Here you are one week before departure, and demand was better than expected. In fact, you’ve sold all 160 seats, including the 25 full fare tickets that you were primarily holding back for last minute travelers. You sold too soon, and that’s something Scott Kirby noted was an issue at United. The airline is changing its processes so it doesn’t happen as often, but it will still happen. What can you do about that? Well, today you really have two options.
a) cry like a baby about the lost revenue and hope you can do better next time
b) increase authorization levels so you can sell more full fare tickets knowing that you’re highly likely to have to bump people
From a customer service (and decency) perspective, the right thing to do is go with option a). In that situation, this tool would allow United to go to someone 5 days in advance, offer them a little voucher to switch to a different flight, and then have enough time to re-sell that ticket to a last minute traveler paying full fare. Everyone is happy. United gets more revenue (assuming it actually can re-sell the seat). The volunteer gets to take a new flight that may even be better AND gets a voucher for it. Lastly, a last minute traveler who really wants to be on that airplane can buy a ticket. Huzzah.
But do we really think that airlines don’t use option b? In reality the system is constantly rebalancing, looking at the demand and adjusting inventory as it goes. In the past, it was probably far likelier that the system would open up more full fare seats if the flight was selling out knowing that United could get more money even accounting for the likelihood of having to pay someone to get bumped. But the climate has changed dramatically over the last few years, and airlines are getting much more pressure than before about NOT operating that way. But let’s say it still does happen…
In that case, this tool actually would reduce overbooking. And while everyone would still gain something, there are losses to be had as well. United doesn’t increase revenue since it was going to sell those tickets anyway, but it does decrease cost. Instead of having to pay hundreds in vouchers or cash to someone getting bumped on the day of travel it instead pays a whole lot less several days in advance. The volunteer may make less money on the deal, but he now earns that money way in advance and doesn’t have to get tortured during the airport process. For the last minute traveler, nothing changes and the seat is still available.
It’s hard to know how often United will find itself in a situation like this, especially once it gets it revenue management system working as it wants. If it happens very infrequently, then there’s nothing stopping United from doing this manually on its own today. But if it happens more often, then this could be a useful tool.