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Can overbooking be a win-win

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The video footage of a United Airlines passenger being forcefully dragged along the aisle and down the plane must have sent a cold chill down many people’s spines, not least that of United Airlines CEO, Oscar Munoz, who eventually issued a statement, apologizing for “having to re-accommodate these customers” and assuring the public the carrier is “reaching out to this passenger” to “resolve this situation”, albeit after a seemingly extended delay (New York Times, April 10, 2017).

Overbooking is a commonly adopted practice in which airlines sell more tickets than available seats. The rationale is that early buyers may not show up for the flight eventually so selling more than its capacity helps the airlines fill seats at the time it takes off, and late buyers may get a chance to fly. For some travelers who have flexibility on their side, overbooking may even be an opportunity for additional cash or gift card compensation or to be upgraded to a higher class in a later flight.

According to the Bureau of Transportation Statistics on the largest U.S. air carriers, 1 million out of 610 million (0.09%) passengers were denied boarding or “bumped” in 2015, among which, 48% involved involuntary bumping. In both the US and Europe, the Transportation Department stipulates rules for overbooking, such as the compensation amount for denied boarding should depend on the price of their ticket and the length of delay.

Overbooking has attracted rather controversial views, particularly with the latest episode. Some consumers hated and were traumatized by it while others gleefully attempt to benefit from it. Our recent research on the bumping policy shines some light on the current practice. In contrast to the seemingly ad hoc practice of bumping, our findings advocate that airlines be transparent about the possibility of being bumped to travelers and the adoption of the voluntary bumping policy.

In particular, compared to involuntary bumping, even though voluntary bumping may require a higher bumping compensation, it can be more profitable for the airlines and also concurrently maximize the social welfare. This is because voluntary bumping can achieve an efficient allocation of the service and, consequently, lead to a win-win outcome for the consumers and the airlines when consumers are fully aware of the bumping possibility.

Furthermore, we also suggest that the regulator play a more active role by stipulating the mandatory compensation under involuntary bumping to incentivise airlines to adopt voluntary bumping “voluntarily”. Our findings thus shed a positive light on the overbooking policy and propose that airlines and regulators alike, work on raising consumer awareness on the overbooking practice.

To this end, some airlines have already adopted measures to alert passengers about the possibility of overbooking during online check-in. This certainly helps to avoid situations like the latest United Airlines saga. Forcefully removing paid customers who are already on board for its own employees spells public relations disaster. For travelers who want to avoid such messy situations, checking in early is probably the way to go, at least for now, before airlines and regulators relook at the adoption and implementation of overbooking for a win-win outcome.

This article was contributed by HKUST Business School.

Man Yu

Man Yu is Associate Professor of the Information Systems, Business Statistics & Operations Management Department at the HKUST Business School.

Wei Shi Lim is Director, Office of the Vice President (University and Global Relations) and Associate Professor at the National University of Singa

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