The Economics of Airline Overbooking

Canada, Commentary, Mary-Jane Bennett, Transportation

A recent CBC radio report focused on the woes of an overbooked airline traveller. Missing was an analysis of the airline perspective. 

Overbooking is not, as consumer advocate Gabor Lukacs claims, a “deceptive practice.” Ralph Nader used the same language in his case against Allegheny Airlines back in the 1970s. The U.S. Supreme Court termed airline overbooking “common industry practice” that makes the most efficient use of aircraft. So common is it that passengers can log into the U.S. Department of Transportation to check the overbooking statistics.

Occurring at Air Canada at less than 1% of the time, overbooking is pretty rare. And, airlines are hardly alone: hotels, cruise ships, even internet service providers overbook. For some, it’s hardly a headache. Studies show that for every unhappy traveller, there are nine others who will gladly volunteer to forego their tickets in exchange for compensation.  And, they can thank Dr. Lukacs for higher compensation.

For airlines that offer refundable tickets, like Air Canada, overbooking is necessary. A refundable ticket provides passengers with the freedom to change their tickets and almost 10% never show up for their flights. Empty seats mean lost revenue to airlines. Indeed, Air Canada books more passengers for flights than it has seats, which actually saves other passengers money.

The airlines use computer software to try to pinpoint who the no-shows will be and where they will be flying. Some inputs are generally known. Business passengers rank as the number one no-shows, often booking three flight times when an anticipated meeting has yet to be confirmed. Not likely to miss out on vacation time, leisure travellers can be counted on to be at the gate. But, passengers tend to oversleep the red-eye flights and to get into traffic jams. Poor weather causes more no-shows.

Economics drive airline overbooking. Few industries face steeper costs than airlines. Aircraft upgrading is necessary to address new traffic patterns and business trends. For example, carriers from the Middle East and Asia have sparked the latest trend – the ultimate reclining, semi-private suite in business class. Airlines with business class customers must remain competitive in luxury seat design and other trends that require high cash flow.

Typically, about one-third of an airline’s profit goes to its workforce. Not only labour intensive, Air Canada’s unionized labour force, provides competitor, WestJet, a 20% cost advantage. Aircraft maintenance amounts to about 13% of an airline’s costs. With slim profits amounting to $131 million last year, Air Canada paid about a billion dollars to the federal government in airport and air navigation fees. Advertising, administrative expenses, pension plans, astronomical fuel costs and depreciation all leave airlines, such as Air Canada, with razor-thin profits.

Savvy travellers are now gaming the airlines’ reservation system. Blogs have sprung up with tips: be first in line, let the ticket agent know you’d take compensation, fly through hubs, book the “red eye” and book in bad weather.

“I see a big weather system, I see big dollars” is how Boston engineer Ryan Kingsbury describes his strategy—one that earned Kingsbury more than $6,500 in flight vouchers in just three years. One Florida student boasts that he never actually pays for a ticket. Strategic booking, he claims, has earned him “well over $10,000 in flight vouchers in three years.”

Legacy carriers like Air Canada are now at a serious competitive disadvantage to their low-cost counterparts, resulting in fragile equity flows in the airline industry worldwide, as reported by global consultancy McKinsey.  Since Air Canada is a fundamental contributor to the Canadian economy, it is imperative to balance the increased consumer rights that Gabor Luckas won recently; overbooking is an effective way of redressing the imbalance.