Why do airlines overbook flights? | CNBC Explains

Have you ever experienced being hit? I'm talking about buying a plane ticket, packing your bags, arriving at the airport and then discovering that the airline has deliberately

overbook

ed your flight and you no longer have a seat. Most of us hate to see this happen, so why do

airlines

keep doing it? Airlines have been deliberately overselling

flights

for decades. After the deregulation of the airline industry in 1978,

airlines

were encouraged to increase the number of passengers on their

flights

. And they identified a big missed opportunity for more revenue: all the seats sold but empty. In fact, most flights take off without the seats being completely full.

To many, this may seem greedy, but airlines argue that

overbook

ing is a way to provide long-term sustainable service in a very competitive industry. It helps them weather a number of variables that can affect their profit margins, such as rising labor costs and changes in fuel prices. Recently, the International Air Transport Association lowered its 2019 outlook for the global airline industry by more than $7 billion, largely due to rising jet fuel prices. Thus, the overselling of airline tickets helps airlines maximize their profits, but according to industry experts it also benefits passengers. It gives them more options and access when booking flights and also allows airlines to charge less for a ticket.

Overbooking, as well as unplanned operational problems, meant that in the United States last year more than 380,000 passengers were denied boarding. Most were volunteers, but almost 12,000 passengers had no choice. When flights are oversold, most airlines use sophisticated revenue management systems to choose which seats to oversell. These systems are powered by artificial intelligence software that analyzes historical flight data and other variables such as date, time and even special events, allowing airlines to profile the type of fare sold and estimate the number of empty seats there will be. For example, you can detect an increased risk of no-shows on connecting flights from passengers, who could miss their connection if their first flight is delayed.

There is also a chance that speculatively booked tickets could result in empty seats. For example, optional large group bookings may end up requiring fewer seats than expected, which is why airlines will overbook these flights until seats are named and paid for. But the opposite also applies. Once confirmed, group bookings are very likely to appear, meaning the airline's need for overbooking will be reduced. Airlines are also alert to flights with passengers on flexible tickets. These tickets cost more, but allow travelers to change their flights free of charge. Flexible tickets, commonly used by business travelers, are one of the main reasons airlines oversell flights.

There is also a high probability that this type of traveler will book flexible tickets on several flights to cover their options, leaving at least one seat empty. This was especially true with the Concorde. The supersonic plane could only seat 100 passengers, however British Airways and Air France reportedly sold up to 130 tickets for each flight knowing that most passengers were business travelers, booked flexible tickets and could change their minds about what flight to take at the moment. last minute. If BA and Air France had not overbooked those flights, the empty seats would have been a big blow to their profitability.

On the other hand, if the ticket is non-refundable or not flexible, the passenger is more likely to show up. This is usually the case with budget airlines. Many of these airlines tend not to overbook as much due to low no-show rates, around 5%. Even with sophisticated airline revenue management systems, empty seats remain a problem for airlines. Last year, the global passenger load factor was 81.9%. That means that, on average, planes fly with almost 20% of their seats empty. It would be understandable to think that the number of people being denied boarding has increased thanks to the numerous incidents that have gone viral on social media in recent years.

But as data collection and technology have improved, that number has actually been decreasing. In 2018, there were a total of 11,835 involuntary denied boardings by the top 10 US airlines. That may seem like a lot, but it amounts to just 0.14 involuntary increases per 10,000 passengers booked to fly, the lowest figure since records began in 1995. Still, sometimes too many people show up for a flight. So what happens then? The first airlines will ask if any passenger is willing to give up their seat, which is also known as voluntary denial of boarding. The vast majority of overbookings in the US last year, about 97%, were resolved voluntarily.

But if there aren't enough volunteers, airlines will involuntarily push passengers through the airport. The criteria for determining who is denied boarding varies by airline. However, according to some industry experts, you're less likely to be turned away if you're flying first class, have a very high status in the airline's frequent flyer program, or are traveling with your family. If you are traveling alone, are one of the last passengers to check-in, and bought your ticket at the last minute or at a cheap fare, you are more likely to be rejected. And if you are involuntarily denied boarding, there is nothing you can do about it.

This is because when you book a flight, you agree to the airline's contract of carriage. The terms and conditions of that contract state that the airline has the right to deny boarding to any passenger it wishes. So are passengers at the mercy of airlines? Passenger rights legislation varies around the world, so it depends on where you are and which airline you fly with. If you fly to or from EU airports on a European airline, you will generally be well protected. This is due to the EU Flight Compensation Regulation. Let's say you've been denied boarding on your overbooked flight from London to Paris.

EU law gives you two options. One is a full refund of the ticket plus a return flight to your original departure point if you had traveled on a connecting flight. Or you can request that we redirect you to your final destination as soon as possible or at a later date that suits you. Regardless of the option you choose or the duration of the delay, you are also entitled to compensation related to the distance of the flight. In the US, compensation for a rejection is based on the length of the delay and whether it is a domestic or international flight.

If you were involuntarily removed but arrived no more than one hour after your originally scheduled arrival on another flight, you will not receive any compensation. If the airline doesn't make substitute travel arrangements, then the maximum you can claim is $1,350 on a domestic flight, regardless of whether the cost of the ticket exceeds that amount. Airlines may offer such compensation in the form of cash, travel vouchers, or a combination of both. You might be surprised to know that there are passengers who love to get turned away and intentionally book flights at busiest times to increase their chances. Some airlines, such as the American United, offer compensation of up to $10,000 to passengers who are rejected.

People who urgently need to travel also benefit. They can buy tickets for an outing, even if they are theoretically sold out. Additionally, filling every seat on a flight helps reduce the environmental impact per passenger, at a time when commercial aviation faces criticism over its carbon footprint. As artificial intelligence and algorithms improve, the number of jet-setters denied boarding will continue to decline. But airlines make more money by overselling flights than they lose by compensating passengers without seats. And that means the current business model is not likely to change anytime soon. So don't be surprised the next time you get hit.

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