The term ‘overbooking’ sounds dreadful to those who once got denied boarding on a flight that they were scheduled to fly on. But is it really just a lottery with a prize nobody wants?
The Infinite Money Glitch
Put simply, overbooking is a trick airlines do to earn more money. They oversell the flight, meaning they sell more tickets than there are seats in the airplane. By selling the nonexistent seats they earn additional revenue without any cost. But are they really?
If too many passengers show up at the gate, there will be some people who cannot fit into the flight. The airline had already committed to the transportation service so it has to be provided. To sweeten up the inconvenience, regulators in many countries including those in the Americas and Europe, introduced rulings ordering airlines to additionally compensate the bumped passengers. That’s a cost that can be associated with taking too much risk with overselling.
The Math Behind It
There are two major components of overbooking: decrement and no-shows. The first component describes the misalignment between the peak interest in the flight and the actual departure date. Depending on the market, it is very common for flights to see the peak of their bookings a few days before departure. This is often a result of canceling a portion of the bookings that is usually allowed for the group travelers as well as canceling or rescheduling of the individual passengers that are allowed to do so in their fare rules. This phenomenon varies from market to market as more expensive long-haul flights will not see much demand at all near the departure time, for example.
The second component is connected to no-shows. Some passengers will have a booked seat on the airplane all the way till departure but never show up to board a plane. This can also happen for multiple reasons. Some passengers are allowed to change their flight plans even after the flight departs if they purchased a flexible ticket.
Other passengers may have booked a cheap ticket that had no flexibility at all but their plans changed anyway. Finally, there are some operational reasons too as a delay on another flight might mean that some passengers will miss their connection.
Who Benefits
It seems that passengers are experiencing only the downside of the overbooking process. After all, we only see the results of it if someone in our surroundings gets denied from the flight. The truth is much more blurry.
The described decrement and no-shows are inevitable. If it wasn’t for overbooking, flights would leave not full in the majority of cases. This would cause spoilage, which is just an industry term for missed opportunity.
The economic benefit for the airlines is clear. As long as the company manages the costs associated with overbooking, it gains a few percent more revenue on the demanded flights. For an industry that is averaging a three percent profit margin, that can make or break the annual result.
The customer gains too, at least according to IATA. Overbooking can lead to lower fares and more choice. In a highly competitive field, which the airline industry definitely is, there are no free lunches. All the extra profits will eventually make their way to the customers. To compete with other carriers while staying on the edge of profitability, airlines anticipate higher profits resulting from overbooking and start booking seats from a lower entry-level price. Similarly, the carriers can afford to keep some unprofitable routes flying if those in demand can generate a bit of extra profit at the end.
