One of the big questions coming out of the pandemic is around what changes that occurred will remain permanent and what will shift back to “normal” eventually. On the revenue side, we have American believing that wide, sweeping changes have create a new normal. Delta has taken a more conservative and measured approach.
For that reason, I’m always interested in seeing what Delta says about this new world, and that means listening to President Glen Hauenstein give his opinions on the quarterly earnings calls. Last week’s call gave some interesting nuggets, and today I want to focus on Delta’s efforts to start overbooking more. This is a good thing. Get excited. Seriously.
In recent years, Delta has not been afraid to oversell its flights. It bumps more than twice as many people per enplanement than American or United.
Denied Boardings per Ten Thousand Enplaned Passengers by Marketing Airline FY 2022
That being said, when Delta bumps, it has no trouble paying the price to get people to take a different flight on their own, or what the industry calls a “voluntary denied boarding.” You can’t see it on the chart, but during 2022, it reported a whopping 2 people that had to be involuntarily denied boarding, and those are the ones you want to avoid.
My assumption here is that Delta solicits earlier, more often, and is willing to go to a higher price in its bid to avoid bumping people involuntarily than American does. Like Delta, United almost never bumps someone, but it also presumably overbooks less since its voluntary rate is much lower than Delta’s.
So, it was with interest that I read Glen’s comments on needing to increase overbooking due to a higher rate of no-shows. The airline’s Q1 load factor was 81 percent. This was a huge increase vs Q1 2022 when Omricon was still wreaking havoc on travel demand, but it’s a couple points lower than where Delta had been in pre-pandemic Q1s.
Delta calls the percentage of people who show up the “materialization” rate. In other words, what percent of bookings actually materialize versus being canceled or changed? These days, behavior has changed and people are changing more frequently than before. You could say that this is due to the disappearance of change fees, creating less friction for people to change their flights. But the removal of change fees was also a response to changed customer behavior during the pandemic. So there is something of a “chicken or the egg” question here.
Either way, with more people not showing up for their booked flights, Delta wants to start overbooking more. But as Glen explains, the airline is approaching this cautiously.
…So, if you were [booked to] 103% [of capacity] on average and you have 2 extra points [to fill due to lower materialization], you just go to 105% in terms of what your ability to take is.
There’s a little bit of risk in that, and so we probably won’t go to 105% right away. We go to 104%, see how that works, 104.5%. And that’s why you have to retrain yourself and see what the actual events happen because these are changing in relatively condensed time periods. We don’t want to overshoot and cause a disruption, so we’re going to be a little bit more careful on getting that real-time.
The key here is finding consistency. I don’t think Glen was using real numbers here, but let’s just pretend he was. Let’s say you consistently have 5 percent of travelers not showing up. You would then book every flight to 105 percent, knowing that every single time you’d come in right on the nose.
But that is not how demand works. It’s choppy. I remember in the old days at America West, we had Friday night flights from LA to Vegas that were full of no-shows. My memory gets fuzzier every year, but I seem to recall we’d overbook those things by a third or more, and the airplanes would go out with empty seats. But try doing that to a flight from Omaha to Las Vegas and you’d have a very different profile.
Even that madness is solvable, however, if each route is consistent. The problem is, we’d have some Fridays where everyone would show up for those flights to Vegas. It was an unmitigated disaster. But you play the averages, and you also have to respond to the environment around you.
Over time, airlines have begun to overbook much less. Take a look at these eye-popping numbers from 1999.
Denied Boardings per Ten Thousand Enplaned Passengers by Operating Airline FY 1999
These numbers look absolutely bonkers compared to today, but that’s because things changed. The feds jacked up the amount airlines had to pay for involuntarily denying someone boarding. Then, of course, Dr Dao got dragged off a United Express flight by the local police. That made airlines change their procedures to pay a lot more to avoid involuntary denied boardings. Costs skyrocketed, so airlines backed off on overbooking as much.
Now we live in a new world of no change fees, and behavior appears, we hope, to be solidifying into a pattern. With a pattern, airlines like Delta can start increasing overbooking rates to fill more seats. Glen’s comments are encouraging.
In case I wasn’t clear, we should all be happy about this. Having no change fees is a clear consumer benefit, because it allows people to change their plans more freely. That is not good for airlines unless it’s happening at a consistent rate. If it is consistent, they can just overbook more and offset the impact of having no change fees. Everyone wins.
If airlines can get a hold of this issue, then it bodes well for change fees remaining off the books in the future. I’m hopeful that’s what is happening here.
