I’ve read a couple references to this recently (of course). But I don’t understand how this actually works. If the cost of flying a plane is a constant, and if the airlines priced the tickets of each flight to exactly cover that cost, then I could understand how 108 tickets might cost slightly less apiece than 100 tickets. But the cost of flying a plane is NOT constant, and the airlines DON’T price the tickets on any particular flight so that the cost of the flight is covered by those tickets. So - how does overbooking lower the costs to everyone?
This is simple. Bookings, don’t pay the airlines anything. They are a COST. Because the people who BOOK a flight, don’t have to pay anything if they don’t actually get on the plane.
Since lots of people take advantage of that, and book several flights (in order to reserve seats) and then cancel all but the one they actually take, the airlines HAVE TO overbook many flights, in order to end up with a reasonably full plane.
The way that works for the customers and for the airlines, is indirect. By overbooking, and then having people drop out so that it actually turns out that they CORRECTLY booked the flight, the airline makes a normal profit, and therefore doesn’t have to RAISE prices for everyone.
You have to realize how fluid everything is.
If instead, the airlines all required that everyone pay full price when they reserve their seats, OR if they required a non-refundable down payment, then the reason for overbooking would be erased. But then again, a lot of flights wouldn’t reach sufficient capacity, and so would Lose money for the airlines, which would have to be made up on other flights, by charging more for them.
For airlines (and many other businesses) they have to blame their lies, damn lies but mostly their statistics. 
In this case they can blame the binomial distribution functions:
TED-ed video
Why do airlines sell too many tickets? - Nina Klietsch
[QUOTE] For the sake of simplicity, we'll assume that every customer is traveling individually rather than as families or groups.Then, if there are 180 seats on the plane and they sell 180 tickets, the most likely result is that 162 passengers will board. But, of course, you could also end up with more passengers, or fewer.
The probability for each value is given by what’s called a binomial distribution, which peaks at the most likely outcome. Now let’s look at the revenue. The airline makes money from each ticket buyer and loses money for each person who gets bumped.
Let’s say a ticket costs $250 and isn’t exchangeable for a later flight. And the cost of bumping a passenger is $800. These numbers are just for the sake of example. Actual amounts vary considerably.
So here, if you don’t sell any extra tickets, you make $45,000. If you sell 15 extras and at least 15 people are no shows, you make $48,750. That’s the best case.
In the worst case, everyone shows up. 15 unlucky passengers get bumped, and the revenue will only be $36,750, even less than if you only sold 180 tickets in the first place. But what matters isn’t just how good or bad a scenario is financially, but how likely it is to happen.
So how likely is each scenario? We can find out by using the binomial distribution. In this example, the probability of exactly 195 passengers boarding is almost 0%. The probability of exactly 184 passengers boarding is 1.11%, and so on. Multiply these probabilities by the revenue for each case, add them all up, and subtract the sum from the earnings by 195 sold tickets, and you get the expected revenue for selling 195 tickets.
By repeating this calculation for various numbers of extra tickets, the airline can find the one likely to yield the highest revenue. In this example, that’s 198 tickets, from which the airline will probably make $48,774, almost 4,000 more than without overbooking. And that’s just for one flight. Multiply that by a million flights per airline per year, and overbooking adds up fast.
Of course, the actual calculation is much more complicated. Airlines apply many factors to create even more accurate models. But should they?
Some argue that overbooking is unethical.
[/QUOTE]
You generally have to pay for your ticket before you have a guaranteed reservation. So this doesn’t really work.
There are always people who miss their planes, even if they intended to make the flight.
Traffic, auto breakdowns, unexpected illness, etc. So, airlines overbook to try to keep the planes 100% full.
Note that this wasn’t always the case. I the 80’s, I use to fly on planes that were only 30% full - it was great. Everyone got their own row if they wanted it. Those days are long gone.
The cost of flying a plane isn’t constant, but it’s pretty close to constant. The weight may be less with only half as many people on board, but it’s not going to be half as much weight, and you still have to pay the pilot and copilot and flight attendants and air traffic controllers and so on.
Agreed. These days, you have to pay to get your ticket. You can’t book and not pay when you don’t show up.
Some frequent flyer programs won’t charge you to re-book to another flight (depending on status level) but you’re not getting your money back for the ticket. Very occasionally, they will give you a credit to use for another ticket in the future.
Nope. You missed it completely.
If you buy a ticket and don’t show up, you still have an unused ticket you can use tomorrow. You wasted *their *seat, but you didn’t waste *your *ticket.
That’s the basic model of airline ticketing. You only pay for the seats you actually sit in. You can waste a dozen before using one if you want. That’s how it really works.
In recent years the airlines have added change penalties in exchange for lower prices. So now you have a choice:
- Pay $800 and be able to no-show as often as you want without penalty and fly whenever at no extra charge.
- Pay $600 but if you no show you’ll pay an extra $50 to use your ticket tomorrow.
- Pay $400 but if you no show you’ll pay an extra $150 to use your ticket tomorrow.
- Pay $200 but if you no-show you can’t re-use or refund that ticket later at all but we’ll give you a $100 credit towards a subsequent purchase.
All of those options are available. But option #1 is the default, the basic product. It’s your choice how much risk of penalty you want to pay for no-showing vs. how much you want to “insure” against that risk by paying extra up front to avoid the penalty.
I was looking at this website: Tips to Get a Refund on Non-Refundable Airfare 2021 | Airfarewatchdog
Apparently it’s easy to get a refund, if you know what you’re doing. With the Canadian airlines I dealt with it’s the same, except I would have to pay a refund fee, maybe even if I canceled the ticket immediately.
Is that really the default option in any meaningful sense? I’d be shocked if most price conscious economy seat purchasers were picking anything but the cheapest fare these days. I don’t think it’s clear to call something the default if 99% of people pick option number four. I’m not sure if that is the case, but it does seem weird to me that most people would be picking option number one.
Many business travelers book at full fare to have flexibility for rescheduling. What fraction of flyers are business, I don’t know.
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iFlling up a plane o maximum like a movie theatre is more profitable.
People who paid less can be bumped for profits if needed.
actually airlines need to make a profit not just break even
Not all flights are profitable so other flights need to make up the difference.
If a flight has few passengers it still has to fly the route, even if they know it will cost more money than is receives in fares.
weather conditions can cause increased fuel costs.
Valid observation. See below.
It depends on the airline and on the specific route.
But ballpark it’s 1/3rd of passengers on the higher/est end fares and 2/3rds on the cheaper/est fares. But those 1/3 of people on the higher fares are paying 3/4ths of the total revenue of the flight while the 2/3rds of people on the cheap fares are paying 1/4 of the total revenue.
The critical thing I see in talking to people is that in reality it isn’t just options 1 through 4. There are 14 options. And people are bad at sorting this out. If Option 14 is the absolute cheapest, that’s what they buy. Even if Option 13 is $5 more for 10x the benefits and protections.
The same thing is true buying a toaster at Target. There will be the fancy $75 and up toasters. There’ll be the ordinary $17-$25 toasters. And there’ll be a $13.99 no-frills model.
Anyone who buys the $13.99 toaster is an idiot; the thing might last 3 months before it quits or falls apart. Whereas the $17 toaster will last a decade. Squeezing that last nickel out of the price produces a disproportionate reduction in quality / features / benefits. It’s the opposite end of the price/performance spectrum where we all agree that spending an extra $300 on a toaster almost certainly doesn’t really give you $300 of extra value.
I’m at a loss here. Would someone explain all the various ticket options mentioned above? When travelling, I simply buy the most economical ticket and fly… Didn’t know there were so many options to game the system.:rolleyes:
It’s far, far more complicated than this. Read up on market differentiation. There’s every chance the $13.99 toaster and the $40 toaster are the same underneath, for example.
This is only true for full price tickets, usually any discounted ticket has a minimum of a hefty fee if you don’t turn up or in some cases if you don’t get on you’ve lost it and have to buy a new ticket.
Seems to me the obvious solution would be instead of overbooking, just charge a penalty fee for a cancellation within 48 hours of flight departure (again most airlines do that overseas). The entire overbooking system is broken, because the people making multiple reservations are not actually guaranteeing themselves a seat (because they might get bumped anyway if it’s overbooked). Charge a penalty fee if you don’t show up to a reserved flight and charge a penalty fee for cancellation that goes up closer to the flight date and time eg $20 for 48 hours ahead, going up to losing 50% of the fare for cancellation within 2 hours of the flight time. Problem goes away.
So let’s say last week there were a bunch of people willing and able to pay $300 for that seat. But you had to turn them away and they have made other arrangements to get to their destination (or decided to just stay home). Your consolation prize is $20. Maybe you get lucky and a new customer materializes at the last moment. Maybe not.
And the fare allocation system already accounts for the last minute customer. They keep some inventory in stock at really high fares that nobody in their right mind except the last-minute customer is going to pay. So they were already holding seats for the expected last-minute buyers.
That analogy breaks down in case of a price-sensitive custimer who is only interested in is getting from A to B. Both the option 1 ticket at $800 and the option 4 ticket at $200 in your example accomplish that. Sure, there are many differences between these options in terms of rebookability, luggage allowances, meals served, airmiles earnt etc. But many customers are not interested in that; they just want to get to their destination. From that perspective, there is no meaningful difference between options 1 and 4 that would justify the price differences, unlike in your toaster example where there could be a meaningful difference between the $13.99 and the $25 toaster that would justify the price difference.
Not for the $13.99 toaster and the $40 toaster. Perhaps for the $17.99 or the $19.99 ones, with the $40 but if there is only one $13.99, these days it’s mostly likely to be made with cheaper material.
At the moment if you bought a full price ticket it’s even worse than that for the airline. You can hold that $300 seat until one hour before the flight, rebook, and then do the same thing again cancelling 1 hour before. Thats why they have to overbook. What I’m proposing is better for the airline than the current system, because it will cut down on the people making multiple bookings they have no intention of keeping.