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veen  ·  436 days ago  ·  link  ·    ·  parent  ·  post: #BoycottUnited

While I do agree that this is an awful way to treat your customers, I have seen quite a few people going bananas over United's overbooking strategy. "Didn't he pay for his seat? How can United sell seats they don't have??!" That just isn't how airlines work these days. I dug up my textbook from airline industry expert Peter Belobaba:

    If too many reservations are accepted and more passengers show up at departure time than there are physical seats, the airline must deal with the costs and customer service issues of denied boardings (DB). On the other hand, if not enough reservations are accepted for the flight and the no-show behavior of passengers is greater than expected by the airline, there are costs associated with the lost revenue from empty seats that could otherwise have been occupied, also known as spoilage (SP). The more specific objective of most airline overbooking models is therefore to minimize the total combined costs and risks of denied boardings and spoilage (lost revenue).

    Why is overbooking even necessary? The simple answer is that airlines have historically allowed their passengers to make reservations (which removes seats from the airline’s available inventory) and then to “no-show” with little or no penalty. In very few other service or manufacturing industries can the consumer “promise” to buy a product or service and then change his or her mind at the last minute with little or no penalty. The economic motivation for airline overbooking is substantial. In the USA, domestic airline no-show rates average 10–15% of final pre-departure bookings, and can exceed 20% during peak holiday periods. Although there are substantial regional differences, average no-show rates are almost as high throughout the rest of the world. Given that most airlines struggle to attain a consistent operating profit, the loss of 10–15% of potential revenues on fully booked flights (which would occur without overbooking) represents a major negative impact on profits.

Another thing he points out is that DB costs are almost always lower than SP costs, especially since optimizing for low SP costs means accepting a structural, large loss. DB costs can also be compensated for with upgrades, free tickets and lounge access, all far lower than the profitability of a few seats. Especially since US airlines have been quite good at getting regular passengers to give up their seats voluntarily:

    With the help of voluntary DB programs, the largest US airlines have become extremely successful in managing DB and the associated costs, despite what is perceived to be very aggressive overbooking to reduce the revenue losses associated with spoilage. The involuntary DB rate among US major airlines in 2007 was only 1.12 per 10 000 passengers boarded (US DOT, 2008). Over 90% of all DB in the USA are volunteers, meaning that the total DB rate for US airlines was about 12 per 10 000 passengers boarded. This total is in line with world airline industry standards of 12 to 15 per 10 000. But the important point is that US airlines are able to report lower involuntary DB rates than most world airlines, thanks to effective voluntary DB programs.