Why Do Airlines Overbook Flights?

I recently came across an article by Eric Jordan, the Conde Nast Traveler Ombudsman, about what type of compensation to expect when you are bumped from a flight due to airline overbooking. Keep in mind this refers to being involuntarily bumped from a flight, as opposed to voluntarily offering to take another routing.

His suggestions for overbooking compensation are spot-on, so I won’t rehash them here, but I thought it might be interesting to talk about why airlines oversell flights in the first place.

Full-Flight

Empty seats are a lost opportunity

Airline revenue and inventory management is incredibly complex, but ultimately it comes down to the fact that every seat on an airplane is perishable. Revenue predictions are based on detailed analysis of projected passenger and cargo loads, which are then balanced with the anticipated costs for everything that goes into operating an airline.

That’s partly why you’ll sometimes see carriers opt for slightly fewer seats on a given aircraft configuration — they know they’ll rarely operate at 100% capacity, and having the potential for more passengers might mean needing an additional flight attendant, which of course increases costs.

For example, previously American had 154 seats on their 737-800s, and per FAA regulations you need one flight attendant per 50 seats. So they actually eliminated four seats from the plane by putting four “permanent” tray tables in center seats. So they’re literally blocking off their own seats so they can’t sell them. That’s because it’s so rare that they’ll sell those last four seats that it’s not worth the extra cost to staff the flight.

So the goal is to fill every seat on the flight (and ideally at the highest price every passenger is willing to pay), but the flight is going to operate regardless of whether 98% or 25% of the seats are occupied.

Unsold seats don’t generate any revenue, and not only is there the opportunity cost of the empty seat, but there are sunk costs as well because of the fuel and resources needed. So airlines are highly incentivized to fill every seat.

Airline operations are complicated

When you look at how extensive route networks and partnerships are today the scale is nearly mind-blowing. The merger between American Airlines and US Airways, for example, will make the combined carrier the largest airline in the world, with nearly 7,000 flights a day to hundreds of destinations all over the world.

That’s a massive operation, which means there’s a lot to potentially go wrong. And one of the causes of airline overbooking is operational errors — or a projected operational issue that didn’t happen. Sometimes the airlines plan for things to go wrong, and sell additional revenue based on that projection. If everything goes correctly, the flight will be overbooked.

As an example, at least historically airlines have hugely oversold flights out of their major hubs, which also act as international gateways. For example, the bank of domestic flights which were a couple of hours after most flights from Europe arrive were most commonly oversold. A massive number of flights arrived at the same time, and the mathematical assumption was that some of those flights would be late, there might be weather issues, some people would be held up in customs, others would have to wait for their luggage, some would be unfamiliar with a large new airport and just not make the flight, etc.

So it wasn’t unusual (and was probably a good business practice) to oversell the afternoon connections by a large number. And that’s great in theory, but on the odd days where everything went right you’d have an ERJ headed to Des Moines with a dozen more passengers ready to board than the aircraft could even accommodate.

Which meant that those people would need to be rebooked on a later flight, which may already be sold out as well, and so on.

Selling some seats is better than selling no seats

On my recent Etihad flight from Abu Dhabi the economy cabin was oversold by at least 30 seats.

To accommodate the passengers, Etihad upgraded around twenty people from economy to business, and then seven people from business to first.

Etihad has 40 seats in their business class cabin on the 77W, so that effectively means they sold half their business class capacity for economy prices, and in a way that actually makes sense.

If you can’t sell 20 seats for business class prices, is it better to sell them for the same effective price as an economy seat to keep them from going out empty?

And given the perishable nature of airline inventory, and all the costs associated with those empty seats, the answer is probably yes in many cases.

So why not just sell first and business class seats at a reduced rate?

Airlines do that as well!

That’s why we’ll often see great prices for travel to Europe over winter, or other times where there is a significant drop in business travel. And many airlines release premium cabin award inventory in the days and weeks prior to departure — because they’ve determined the income generated from the award ticket offsets the cost of operating a nearly empty cabin, or at least enough of it to make it worthwhile.

Overselling economy, however, is often a better way to mitigate risk. If an airline sells 10% more economy seats than they actually have, with the assumption that some passengers will misconnect or whatever, that may ultimately be less costly than discounting the premium cabin seat to begin with.

They also don’t want to cannibalize their own premium demand. In other words, if the normal price for a roundtrip business class ticket is $10,000, and you sell tickets last minute for a fraction of that, business travelers will catch on and start rebooking at the last minute. There’s the potential for a lot of lost revenue that way.

Even when you are oversold, bumping isn’t expensive

Even in instances where a flight does end up being overbooked and they need volunteers, it’s still not all that costly for the airline. In most cases they can find volunteers to take a later flight in exchange for a travel voucher or free ticket. If you can sell a bunch of full fare last minute tickets and then offer others a few hundred dollars in vouchers to take another flight, everyone wins.

Keep in mind that in many cases the airlines will make money on those vouchers too. Say you have a $300 voucher from a bump. You may be willing to pay more for your next flight since the bump voucher helps offset the cost of that ticket, or take a flight you otherwise wouldn’t have.

Bottom line

Airlines have improved their ability to manage inventory and capacity in recent years, which is why we see fewer overbooked flights than we did four or five years ago. Better tools and technology mean projections are more accurate, and capacity in general is more finely-tuned than it used to be.

Also keep in mind the airlines are actually making money nowadays. A few years back most of the legacies were on the brink of liquidation, so they couldn’t in good conscience turn down any revenue. Now that they’re largely making money, they can be a bit more strategic about how they sell seats.

Comments

  1. There’s also the fact that, at least on busy business routes, a number of passengers will intentionally miss the flight on a fully refundable ticket. Many frequent business travelers (me included) will book multiple flights in case meetings run long, delays occur, or our schedules change. These fully refundable (typically Y fare) tickets are quite expensive to offset the uncertainty for airlines but if everyone actually shows up for a flight they had refundable tickets to during a peak travel time, there’s a high probability of the flight being intentionally overbooked assuming some of us would have changed flights or taken a different carrier.

  2. I don’t understand the article… “something outside an airline’s control—e.g., a smaller aircraft must be substituted because of a mechanical issue” – how is this outside of the airline’s control? who is responsible for aircraft maintenance then?

  3. @Lantean: Even with proper maintenance, parts can still fail unexpectedly. Or perhaps a replacement part doesn’t work (in which case, is the problem with the replacement or something else on the aircraft?), or a particular part isn’t available at an outstation. An employee getting injured would certainly be outside of the airline’s direct control, in which case they would need to make sure the worksite is safe, get the individual treated, and in the meantime find a replacement tech. And what if the crew doing the maintenance is a third-party, as so often happens when an airline operates only a few flights out of a particular airport? Then it really is out of their hands.

  4. While I understand the business model and why it’s done I think it should be illegal to sell something they don’t have. It would be like selling 175 movie tickets to a theater that only holds 170 people and figure that some won’t show up and if they do we will have them wait 2 hours to the next showing.

  5. He Lucky, let me pose a real life scenario which happened to me and my family over the summer. We were booked travel from EWR-LHR on UA and LHR-LIS on TP on a single Aeroplan award in business class. Our UA flight was delayed by two hours, resulting in a misconnect in Lisbon. We were rerouted on BA to MUC then LH to LIS resulting in an approximate six to seven hour later arrival the planned. Would we be eligible to receive any compensation for this?

  6. I believe mostly the legacy airlines overbook flights, right? I recall reading somewhere that JetBlue does not overbook its flights.

  7. @ Lantean — Right, it doesn’t make perfect sense, but they do have that “protection” when it comes to the rules.

  8. @ Adrian Wattmaniuk — You’re not entitled to compensation, per se, since the contract of carriage doesn’t guarantee punctuality. That being said, if you email the airline you may receive a “gesture of goodwill.”

  9. @ Joey — Southwest certainly does. I know historically JetBlue didn’t, though I feel like that has changed.

  10. @adrian, eu261 compensation only covers departures from Europe, or flights to Europe on European based carriers. So if it had happened in the reverse direction, you would probably be due 600 euros each…

  11. I believe this is also a reason for some airlines wanting Premium Economy which can cost significantly more than Economy and not be far off a cheap Business class ticket. I recall in a recent BA documentary that WTP is their most profitable cabin, and something tells me this and upgrades using avios from paid WTP together generate a lot of income, before the genuine money generated from the person who will actually fill the WTP seat.

  12. I remember watching a documentary on AA and its JFK-LAX flight (before baggage fees) that said if everything went right and the yield management worked, the profit on the flight was hundreds of dollars which seemed crazy! With flights in US flying more full, I’ve been surprised that overselling seems more prevalent – my last flight from New Orleans on US, the opening voucher value was $600 to give up your seat.

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