Yahoo Finance It’s Time to Fine Airlines for Overbooking Flights
Overbooking on airline flights is necessary, but not necessarily an evil. Overbooking is an evil only when airlines take advantage of lax federal laws (as they often do) for their own profit.
We saw this play out this week, after a video emerged of United Airlines forcibly removing David Dao, a doctor, from his flight on Sunday. This episode has made clear that federal regulation of overbooking needs to become far more stringent than it currently is.
It’s reasonable to ask why airlines overbook while movie theaters and concert halls don’t. A seat is a seat, after all.
The answer is a bit sticky. Overbooking makes sense if the airline industry is considered a quasi-public utility. There is little harm to society when a purchased theater seat goes empty. On the other hand, when an airline customer cancels a reservation at the very last minute or is simply a no-show, the purchased seat that is freed up can be utilized for an emergency business trip, a journey to a family funeral, or another important purpose. Only by overbooking can the general public benefit from a last minute trip cancelation or no-show.
Fortunately, involuntary denied boarding (“bumping”) is actually quite rare. There are usually many more volunteers than needed whenever a gate agent announces an oversold situation. And airlines don’t lose much from offering them: A typical $400 voucher (“bribe”) for future travel normally costs the airline a fraction of $400. After all, the offer is for a company travel voucher, not hard cash. If airlines didn’t overbook, most “totally full” flights would depart with empty seats-in some cases, many of them.
It is a waste of a public resource for scheduled airline flights to depart with empty seats, particularly if the empty seats are on flights where the demand for seats far exceeds the supply. Airlines that do overbook (and a few, such as JetBlue, don’t) are actually operating their airplanes very efficiently.
But efficiency is not primarily what airlines are after when they overbook. They are after more money. By overbooking they can potentially double their revenues for a seat for only a marginal increase in their costs. And there is no harm done to anyone as long as airlines have correctly calculated the last minute cancelation and no-show rates or there are a sufficient number of volunteers should they miscalculate. Most of the time airlines calculate correctly and, if they don’t, volunteers abound.
But occasionally an airline overbooks a flight where nearly everyone who bought a ticket has a job interview, a funeral, or some other extremely necessitous reason to travel on that exact flight. After all, how many free airline tickets are worth missing your mother’s funeral or losing a job?
In these instances, overbooking morphs from an efficient, profitable strategy into a callous corporate scheme that harms the public. Customers can only benefit from overbooking if the practice if it is used conservatively and heavily regulated. Currently, that’s not the case.
It normally costs airlines very little (four times the one-way ticket price, but usually well under the federally set cap of $1,350) to lawfully deny a person the seat they paid for. This is absolutely unconscionable. In fact, it is indicative of a dysfunctional airline business and an even more dysfunctional Congress, as the latter is well aware of the problem, but too cozy with the airline industry to do anything other than slap wrists.
In 2010, the U.S. Department of Transportation starting fining airlines a whopping $27,500 (maximum) per passenger for tarmac delays of more than three hours. A tarmac delay means sitting on the ground with the plane doors locked and no way out for passengers. Since the department intervened with strong punitive policies that conceivably amount to millions of dollars in fines per flight, the number of tarmacked flights has dropped dramatically. Today it is rare for passengers to be imprisoned on a delayed aircraft for more than three hours. The government fixed the problem with a big stick approach. For the airline industry to change, it almost always takes a big stick approach.
Fining airlines something on the order of $10,000 per involuntary denied boarding is probably a good place to start. That will force airlines to offer much higher bribes to passengers willing to take a later flight if there are no volunteers for a measly $200, $400, or $800 voucher. Even more importantly, it will cause airlines to overbook less, or at least less greedily.
Airlines have little to worry about. Even if penalties get tough, they’ll still overbook to some extent. Most of the time, they’ll be able to entice volunteers to take later flights if they offer higher bribes. Profits will continue to roll in for the airline industry.
As United demonstrated a few days ago, airlines will act in their own self-interest if the consequence is only a slap on the wrists. If we learn anything from this incident, it’s that airlines need to be regulated with very big sticks when it comes to overbooking.
Alan R. Bender is professor of aeronautics, and social sciences and economic department chair, at Embry-Riddle Aeronautical University.
