When does overbooking work? (for dummies)

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The short answer is… always. Every possible business outlet practices overbooking in some way or another, and airlines are at the forefront of the game. Seats are perishable commodities, meaning that the moment the aircraft doors close, empty seats are gone and cannot be recovered. The goal then, for most, is to fill to the cabin to the brim and limit this effective loss of revenue.

Overbooking, in a nutshell, takes advantage of exceedingly high demand for a particular cabin class, route or flight and tries to sweat out the fixed resources on the aircraft. There are two main situations when overbooking works and is used well.

Extremely high total demand

This occurs when the overall demand for the flight is so high that it exceeds the supply of the product. This situation is applicable to all carriers and aircraft types, from a 4-cabin Singapore Airlines A380, right down to a 1-cabin Jetstar A320. People want to travel in every cabin offered on the route and will pay any price to score a seat on that service. Good, right? The airline sells out the entire 500+ seats (many of which can be Business and First Class) and wins a decent profit. But we’re talking about a business here. good is never enough. Every flight will inevitably see a certain percentage of no-show passengers – those who have failed to check in due to a misconnection, last minute flight change, late arrival at the airport, simple change of plans or any other reason. Let’s say 10% of the 500 passengers fail to show up. The airline suddenly has 50 spare seats that are going to go completely to waste and perish at doors closed. In hindsight, the revenue management team are sitting there and thinking… ‘if we had known this earlier, we could have sold these seats!’ And so, by taking advantage of historical no-show trends and other factors, the airline will sell seats that do not exist to customers in the hope that this expected percentage of passengers will inevitably fail to show up.

So when a flight is selling particularly well – a little too well in fact – the airline’s teams will allow tickets to still be purchased when realistically there are none left. What happens, then, if all the calculations and predictions fail and more people show up than expected? This is where overbooking has its weakness. In these circumstances, customers are ‘denied boarding’, typically on a voluntary basis first and an involuntary basis if all else fails. Every airline deals with this differently. Some offer cash compensation, some offer a free trip, and others simply say bad luck. Let it be known that almost every airline’s conditions of carriage (which are agreed to by every customer) state that there is no guarantee they will carry you on your ticketed flight to your ticketed destination at the ticketed time. Providing hotels, cash and free trips is pricey, right, so why let it happen? Overbooking modelling is so advanced that the revenue benefits enormously outweigh the small costs associated with denied boarding.

Particularly high demand in one cabin

This situation is a whole different game, but builds on the core concept of exploiting high demand. Take this situation: Emirates flies an A380 daily from Dubai-Sydney-Christchurch and back. This high capacity aircraft is fitted with Economy, Business and First Class, complete with the onboard showers and lounges. Whilst these aircraft regularly run full in First and Business on the long sector (Dubai-Sydney), few people are willing to pay the steep premium for a First or Business Class seat on the 2.5 hour hop from Sydney to Christchurch. However, given the competitive pricing and premium positioning of Emirates, there is typically enormous demand for Economy Class on this part of the flight. With 425 seats in Economy, Emirates rarely has to worry about low occupancy, particularly in the busy periods. However, Business and First Class usually fly near empty, so there’s a whole herd of people downstairs and not a soul upstairs.

The easiest solution? Overbook Economy only. On a given day, let’s say 480 people want to buy an Emirates Economy ticket to Christchurch. There are only 425 Economy seats, but there are 70 spare seats in Business, and another 12 in First. It’s straightforward math. Sell those 480 tickets, and upgrade 55 of them into the empty Business cabin. If it gets worse and more Business seats are sold, simply upgrade those Business passengers to First. It’s here that airlines use seemingly fixed capacity in a fluid way. What was once 425 seats can easily become 480, just through revenue management.

When does overbooking not work?

There is particular emphasis here on the second situation (overselling one cabin). Whilst it is all well and good to upgrade several people to Business for free, what does this do to the high value, loyal customers who have paid full fare for that product? Some say that giving Economy passengers a chance to experience Business is beneficial because it may encourage them to upsell in the future. But this is true only for a small minority of people. The majority will enjoy the free experience but continue to purchase as per normal. Meanwhile, the premium exclusivity of Business/ First Class has been diluted, impacting the people who give most to the airline.

Some airlines will very rarely overbook, or will do so very conservatively purely for this reason. Others also use it as a way of recognising frequent flyers travelling in Economy Class, by choosing them to be upgraded first. Whilst this is great for the passenger, it often leads to complacency and expectation of upgrades, pushing those people to buy an Economy seat, knowing they will receive a complimentary upgrade, foregoing what would otherwise have been a full-fare premium customer.

 

It’s a tricky game and there are winners and losers to each possible scenario. Every single airline on the planet will overbook, but the extent to which they do so and how they manage it varies greatly, and says a significant amount about what said carrier values.

 

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