How Much Compensation Should Airlines Offer When Soliciting Volunteers?

I’m mostly convinced that United’s debacle that ended with the good doctor being dragged off his flight could have been avoided if United hadn’t tried to be cheap. By the time the four deadheading crew members had been added, the flight had more confirmed passengers than seats.

So the gate agent started soliciting volunteers to take a later flight, first offering $400 and a hotel room, and then $800. But that’s where the offers stopped. At that point, the gate agent called the cops, and they eventually dragged Dr. Dao off the plane.

You know the story by now.

United

I’ve been bumped dozens of times, mostly on United. I’ve seen how the process works, and trust me, it almost always works wonderfully. It very efficiently separates those passengers who really need to get where they are going, from those who have flexibility in their travel plans.

The key, however, is that the airline has to make a competitive offer. If you try to low-ball your customers, they’ll just board the plane.

But not everyone agrees. Gary from View from the Wing even has an op-ed in USA Today where he tries to argue that airlines should not raise their compensation because it will raise prices and delay flights.

Is there a limit to how much compensation an airline can offer?

Contrary to what you’ve likely read elsewhere, there actually is no limit to the compensation that an airline can offer when soliciting volunteers.

The part that causes confusion is that there is a limit to how much must be paid for involuntarily denied boardings (IDB), that is to passengers who get bumped from the flight against their will. The compensation that an airline must pay under these cases is regulated by the Department of Transportation — a multiple of the ticket price up to a limit of $1,350. But that’s just for IDBs.

During a voluntarily denied boarding (VDB), the airline can pretty much offer whatever they want. They can offer you a hotel room. A seat in first class on their next flight. A lounge pass. A free ticket. Two free tickets. Or just a nonstop flight instead of your current connecting itinerary. You get the idea.

It’s a private transaction between you and the airline and is not governed by the DOT.

That said, it’s true that with an IDB limit of $1,350 in place, the airline may not have much motivation to offer volunteers more than that, but they can if they want to.

United-777

Should airlines be allowed to overbook?

Although the public seems to have just learned about the practice this past week, overbooking has been going on seemingly for as long as airlines have existed. I mean, even the first flight in history was overbooked — the Wright Brothers had to flip a coin to see who would get to pilot their craft and who would stay behind. (Wilbur won the toss, but crashed, so the first flight happened with Orville at the helm. That’s pretty good compensation.)

All of the legacy airlines — Delta, American, and United — overbook to varying degrees. They have sophisticated algorithms that predict how many passengers will cancel, switch to a different flight, or misconnect, and then overbook accordingly. It’s really a form of statistical arbitrage, and for the most part, the airlines get it right.

It’s also true that airlines like JetBlue and Virgin America generally don’t overbook. And since these airlines tend to rank higher in customer satisfaction, it’s easy to claim that these airlines must be doing it right. But in reality, these airlines operate a much different business than the network carriers so it’s not necessarily fair to compare.

southwest-boarding-process-4

At any rate, Gary argues that airlines should be allowed to overbook as it leads to lower costs. On this point, we agree.

Should there be a limit to what airlines offer?

The problem is that Gary goes on to say that airlines should be limited in terms of what they can offer to volunteers. This is illogical. If we believe in free markets — and if you read enough of Gary’s writing, he surely does — then airlines should be obligated to pay whatever the market demands when they need to buy back seats. That’s only fair.

Gary tries to defend his argument by saying that higher offers will end up raising the prices of airline tickets as the cost of this compensation is baked into ticket prices. That’s fine, I suppose, but let’s remember that we just argued that overbooking actually lowers ticket prices by helping to insure that planes go out full and the airline operates at maximum efficiency. So presumably, the airline is generating more profits by overbooking than they are paying out in compensation as a result of overbooking. 

And if paying more compensation to clean up the messes that overbooking occasionally causes starts to outweigh the gains created from overbooking, then the airlines can, you know, stop overbooking.

In other words, if the incremental profit from overbooking is so small that any increase in compensation will negate it, then just stop already. Of course, I don’t believe that to be the case at all. And I doubt Gary does either.

Will increasing compensation delay flights?

Gary’s argument really falls apart when he starts claiming that increasing compensation will cause flights to be delayed, crews to time out, and society to crumble. (Sorry, I added the last one.)

First, even Gary agrees that the number of flights in which a passenger is Involuntarily Denied Boarding is minuscule. I fly 100,000 miles per year and maybe see one or two such flights — trust me, they can be memorable. And it’s really only those flights that are candidates for higher compensation — if the flight didn’t need to involuntarily deny boarding to passengers, then either it wasn’t overbooked, or the voluntary offer was sufficient. So we’re literally talking about a handful of flights that need to go through some sort of so-called auction process.

Have you ever been to a real life auction? Did it take the auctioneer an hour to sell the item? Of course not. If you blinked, you missed it. Or if you inadvertently scratched your nose, you might have ended up taking home that lava lamp. That’s how fast the act of price discovery can be completed.

It works the same way at the gate.

Finally, if we’re truly worried about how long the auction will take, here’s a suggestion — make a higher initial offer. We’re talking about companies that make billions, yet were discussing the difference of a couple hundred bucks on a tiny number of flights.

Bottom line

There is nothing fundamentally wrong with the concept of overbooking. The airlines have done it for years and it works reasonably well in most circumstances. The only time it really fails is when airlines try to get cute and decide that it’s cheaper for them to IDB passengers than it is to raise their VDB offers. That’s when you get angry customers, or worse, customers being dragged off the plane.

The solution to this is simple — the DOT should significantly increase the multiplier that must be paid to IDBs and also remove the cap on IDB compensation. This will eliminate the incentive that airlines have to be stingy with their VDB offers. Everyone has a price and the sooner that airlines make an offer that is close to it, the sooner the overbooking is resolved. And everyone goes home happy.

Do you think airlines should be limited in terms of how much compensation they should pay?

About Travis

Travis has been playing in the world of miles and points for over a decade. At one time or another he has held status on just about every major domestic airline and hotel program. He has visited all 50 US states and over 50 countries. Nowadays he travels almost exclusively with his wife and three young children.

More articles by Travis »

Comments

  1. “where he tries to argue that airlines should not raise their compensation because it will raise prices and delay flights.”

    I’m not sure that’s a correct reading of my piece 🙂 My argument — directly responding to the USA Today staff editorial — is that government should not ban involuntary denied boarding by requiring airlines to continue escalating their offers to whatever amount is necessary to get enough volunteers. That’s different than saying airlines should not raise compensation, and I also specifically state that I don’t claim the current DOT formula for required involuntary compensation is the correct one either.

  2. @Gary
    “government should not ban involuntary denied boarding by requiring airlines to continue escalating their offers to whatever amount is necessary to get enough volunteers”

    I find this completely mystifying. Governments are supposed to be there for citizens, not to protect the interests of big business against angry consumers by weighting regulations in favour of the companies.

    I would argue that:

    – Either you believe in free markets – in which case, government should butt out of private contractual arrangements between themselves and customers, leaving it to the courts to decide what is fair (which is likely to lead to significantly higher offers from the airlines, and no scenes like United has just created);

    – Or government should regulate properly (have a look at what the European Union directs – having put up for years with airlines bleating about how they would go bankrupt if their cosy cartel was upset, or that customers should be grateful for the lop-sided and unfair terms in their Conditions of Carriage. The EU told airlines to stop, and the national courts have backed this up: for example, any flight originating in the UK (including those operated by the US3), or operated in the UK by an EU airline, has to pay compensation at fixed rates. No guessing. No playing games).

    So here’s the question: if the US3 still find it lucrative to operate out of the UK, where they are required to offer very significant levels of cash compensation at rates set by government, why can they not do the same in their own country?

  3. Why is nobody talking about Delta’s check-in VDB bid system? It seems like such a smart, efficient solution.

  4. “It’s also true that airlines like JetBlue and Virgin America generally don’t overbook. And since these airlines tend to rank higher in customer satisfaction, it’s easy to claim that these airlines must be doing it right. But in reality, these airlines operate a much different business than the network carriers so it’s not necessarily fair to compare.”

    Expand on this further. What is it about JetBlue’s business specifically that allows it to generate a good profit without overbooking?

  5. This all makes sense to me. The current IDB compensation rules almost seem to incentivize the airlines to IDB (since 2x or 4x the one way fare in most cases isn’t likely to come near the current limit). So raising the amount to something like a $1K minimum might be better. With flights being so full these days the “next available” flight that’s offered could be a full day later (as in the ORD case) since airlines seem reluctant to put you on another airline (if such a flight is even available). That’s a huge inconvenience to most people. So I can understand why most people aren’t going to bite for a couple hundred bucks.

  6. How much should they offer? Whatever it takes. Why does Delta have such a low IDB rate compared to. AA and UA? VDB. Their check in process handles this automatically and painlessly.

    Also there’s a ton of misinformation about the DOT IDB rule. The $1350 is the statutory maximum the airlines are required to offer by law. (it’s 4x the ticket price up to the fabled $1350) It’s not the maximum they are allowed to give. It’s like a building code which requires you have one power outlet per wall in each room. You are more than welcome to go above and beyond, they are just telling you the legal minimum acceptable. It’s not meant to limit compensation.

    I also think the $1350 limit needs to go up to $4k considering that many full fare Y domestic tickets are $500-800 these days. The idea of the original rule, with 4x multiplier was to create a financial incentive for the airlines to not IDB routinely.

  7. The government gives the airlines the power to IDB so the government can apply some rules to that power. That said, any airline that chooses to sell more seats than they have should raise the VDB compensation as far as needed to get the number of passengers equal to the number of seats. When that stops being a good deal for the airline they will adjust their economic model of overbooking to maximize their profit.

  8. I believe that part becomes tricky, since the quantification of the dollar value should vary from person to person dependent upon the situation. A person who is a doctor with a surgery to conduct tomorrow would be different from a businessman coming home from a meeting, which would be different from a traveler just doing a mileage run. I believe that if airlines can devise a solid strategic pricing strategy they should be able to come up with this.

  9. Being in the hotel industry, I understand the concept of overbooking based on historical cancellations and no shows. We deal with this by doing a “walk” to another property. I guess one one to stop overbooking is to have the government regulate no over-bookings, but that would also require all rates to be non-refundable and unchangeable. If you are a free market person, I say continue to allow over-bookings, but do not have a cap on the comp and have a higher multiplier. This should result in a smaller number of potential “victims” of IDB. With the United case, the passenger was not denied boarding. That is when it really started going downhill.

  10. Delta’s online bidding is pretty slick and when it gets to the gate, the agents, Redcoats, etc do an excellent job with the negotiations. I’m on an ATL:ORD now that needed 10 volunteers. Offer started at $200 and got to $1,350 for the final passenger to take the deal. Instead of police and head wounds all I saw were smiles of people happy to get their vouchers for a 4 hour delay in their travel plans.

  11. I’m one of those people who got confused with all the compensation since I’ve never gotten a VDB. Sure I’ve heard the gate agents make offers at the gate but not for my flight. I read the $1350 cap someplace and immediately thought that’s the maximum any airline can offer (realizing later that it’s only for IDBs, not VDBs.)
    I think we all learned so much about this process from last week’s horrific incident and now I’m more informed. Thank you.

  12. yesterday in SJU, I walked by Delta gate asking for volunteers starting at $600
    I boarded my AA flight and once boarding completed they asked for a volunteer, started at $600, at $800 the captain came out with hand raised (funny guy) and the coach cabin chanted $1000! at which point they got a young guy to give up his seat.
    my family was in the next AA flight two hours later when they asked for a volunteer at got one at $600
    I’ve rarely had this happen and now after united incident three times in the span of a few hours at one airport

    i was tempted at $1000 but had a first class seat on the A330 1-2-1 config so wasn’t moving as I couldn’t see open flights the rest of the day to get home

  13. It would seem that UA’s price should have gone high enough to get their flight crew moved on time. If the costs of cancelling a flight the next day are so great then why not up the offer?

    In the mid 1990s I’d pick FLL for my South Florida business trips…cruise ship traffic meant a large number of over booking problems on DL. I was single and very flexible then, I’d grab $500 or more on vouchers and either wait or drive up to PBI. I’d then also add segments to get home, for status. And since I was on full fare economy tickets I’d use 5k Skymiles and buy up to F. Life was good then, well it was as good as it could get with tons of travel for work and going home to an empty house…

  14. Well written and persuasive. I’ve made a couple of similar points in commenting on Gary’s posts, so naturally I consider you have made the better argument. 😉

  15. @Ivan A. , there is a pricing strategy, it’s called the free market and is pretty good at price determination

  16. If they are actually worried about delaying flights because of the bidding process, they should offer checks instead of vouchers. Vouchers expire and have other restrictions which render them nearly useless for some of us.

  17. Agreed, @Lucky and @Donna.

    Vouchers and Cash are not interchangeable, especially for those of us who can’t/won’t travel often enough to use them, and the minute that cash is offered in similar amounts, there will be many more volunteers!

  18. First, in my opinion, a discussion about the IDB rule and Dr. Dao is entirely misplaced as I do not believe that United was entitled to invoke the IDB rule to yank him off the plane either under its contract of carriage or the law generally. My view is that the only legal way to get any of these passengers off the plane once boarded was to get them to leave voluntarily. The key is that they had already boarded. Read the contracts of carriage and see if you disagree. (Remember too that these are so-called contracts of adhesion, which are interpreted against the drafter).

    Second, now that we’re talking about the IDB rule, my view is that it needs to be modified, not eliminated. As drafted, it encourages the airlines to cheap out — especially on a segment like ORD – SDF. To the bean counters at United who likely hamstrung their agents into not permitting them to raise the $800 voucher offer to Dr. Dao, it was cheaper to IDB him (under the mistaken impression that to do so was legal). Thus, the agent bound by the rules, had no other choice other than to treat this as an IDB. Consider also that Dr. Dao was likely chosen because his fare was the cheapest. It’s highly likely that the segment would have been capped at the 4X amount and that was probably something like $200 or so. This was, after all, a connecting segment to a longer flight on an advance purchase round-trip. We don’t know yet, what United valued this segment at, but it’s likely in the $50-$100 range (and my bet would be on the lower end). Thus to even suggest that he would have received $1350 is very misleading. Had they owed Dr. Dao $1350 cash, United wouldn’t have had rules in place that prevented the agent from raising the $800 funny-money, voucher offer.

    P.S. – I don’t think Gary was exactly wrong in his arguments. They are very nuanced and the nuance is hard to explain in 350 words or less. We live in a sound-bite, 144-character world. You’re presumed wrong if you can explain it within those strictures.

  19. The basic problem with the IDB rule is that it is 4X of the fare purchased. It should be 4X of the last minute walk up fare for the route. Otherwise if someone has a 200 dollar advanced purchase fare the airline has every economic incentive to bump him/her for someone who walks up at the last minute and buys a 1000 dollar walk up fare. Even with the bump and the cash the airline is ahead barely and if the bump is not needed its definitely ahead and of course if the IDB compensation is 800 dollars why would the airline go VDB for any higher (1350 is a cap). Basically IDB should be so high that airlines would always try for VDB and about the only time they should IDB is a must fly situation. Even then if they already board the passengers after that only VDB should be allowed no more IDB.

  20. I don’t understand that on an overbooked flight everyone is given a boarding pass and then a bidding process happens on board. Boarding passes should only be given for the available seats. When the plane is full any more arriving passengers do not get beyond check in. A higher price could be charged for a “guaranteed” seat, other passengers will make sure they get to the airport early!

  21. Scudder, I too wonder why no one is talking about Delta’s system. It seems reasonable and orderly and does not involve beating up your own customers.
    anon: grow up. I was recently in the hospital in Finland. Oh my, what a little socialism can do…and do a lot better than the nohealth/nocare, lottery-of-life, decidedly UNfree market US systems. Btw, the Finns care about money, too, but deal with issues as decent concerned citizens, not soccer louts.
    I read much of this commentary and wonder how it got to be that ordinary folks need a legal team and bodyguards to fly from Chicago to Louisville.

  22. How about when overselling seats beyond capacity, the tickets are sold and clearly labeled “STANDBY”, and these passengers are only boarded if there are no-shows.

  23. Once upon a time, some airlines sold “stand-by” fares; that is, tickets whose terms provided that the ticket-holders were not entitled to any compensation for denied boarding. Nowadays, pass travelers are the only ones treated that way.

    Also, airlines are moving part of the price (that the “four times” is based on) to fees, lowering how much they must pay for involuntary denied boarding, in ways that were not contemplated when the current IDB compensation was set. A fare that used to be $300 including a meal with beverages, 2 checked bags, a carry-on bag and personal item, now may be stated as $200 plus ticket fee plus seat price plus boarding pass printing plus checked bag fees plus a fee for the carry-on bag, plus food for sale… so the IDB payment has dropped by $400 while the lost revenue if a passenger does not show up for the non-refundable seat is higher. That increases the optimal overbooking level, and thus makes denied boarding events, both voluntary and involuntary, much more common.

    Also, when the IDB compensation was set, most carriers’ Contract of Carriage still had the remnants of CAB rule 140 (and FAA rule 240d), setting prices for airlines to carry passengers originally booked on other airlines, so multi-day delays were rare. Now airlines want to charge interline fees higher than they are themselves willing to pay, so passengers have to wait. And the involuntary denied boarding amount is often insufficient for a passenger to proactively buy a walk-up fare on a competing airline.

  24. Obviously the purpose of overbooking is that the airlines allow for a certain number of passengers with fully refundable tickets who it predicts will cancel at the last minute or just not show up. So if they are wrong in their prediction and aren’t able to get enough volunteers from an auction, it seems to me that the fair thing to do in choosing which passengers to IDB is to pick from the refundable tickets first. Those who made non-refundable reservations should be the last to be IDB’d since they made a contract with the airline and have to honor it, so the airline should honor it from their side. That way the passengers who benefit from the flexibility that causes the airlines to overbook would bear the non-monetary price that results.

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