…some argue that since the last tickets sold are usually the most expensive, airlines have too much incentive to sell $1,000 tickets when no seats are available if the penalty is only $400 to bump a cheaper-fare passenger.
That is from the 10 October Wall Street Journal, p.D1.
actually they don’t have *enough* incentive to do that. If I am already booked on the flight and my opportunity cost of waiting for the next flight is only $100, and the airline just (over-)sold a ticket to P for $1000, then the gains from trade are at least $900.
But when the airline has to pay me $400 to bump me, they internalize only $600 of those gains from trade. The problem is due to private information: I am a monopsonist (or at best oligopsonist) when the airline has to buy back my seat and I get information rents.
Jeff,
I guess we should have some form of ascending price auction at the gate, with the seat-less last-minute business traveler calling out ever higher bids until the ticket holder with the lowest reservation price is willing to sell.
Mike,
I may have just been lucky, I guess. I made four domestic trips in the last 5 weeks, so I have definitely flown recently, and I have many more trips in my calendar in the fall. Certainly nothing I am looking forward to.
Btw, my point was not that people (or college students) like disruptions, but that we only need a sufficient number of people who value the pain of the disruption at less than 400 bucks.
Imagine Dopey Airlines manages to sell only 10% of their seats on any given flight. At the same time, Genius Airlines manages to sell 102% of their seats on any given flight. Guess which airline’s passengers have to pay about 10x more for their seats.
Ban or otherwise artificially hinder overbooking and your ticket price goes up.
Wrong, guys! the $400 is the govt. maximum payout to passengers who are INVOLUNTARILY bumped. This the Kelo decision (government helps someone else to your property at below-market cost), not the Coase theorem (you reach a fair price).
Airlines can, and do, offer more than $400 to volunteers who freely give up their seats; I’ve made up to $1000, although in airline vouchers rather than cash. Presumably they do this b/c of the goodwill they lose due to involuntary bumpings.
I am strongly in favor of a world where involuntary bookings are banned and airlines have to bid as high as necessary to get volunteers. Please let me know when that world arrives..
good point, benny. a lot of the “last tickets” are airplane employees travelling standby-only. (At least where I fly; I live in Atlanta so delta employees are everywhere).
A few things to consider:
1. I know several people who explicitly seek out flights on an airline known for a high denied boarding rate because they hope to take advantage of being bumped.
2. For the guy who switched to JetBlue, you should never be bumped on that airline, because no ticket they sell is refundable. You are, in effect, purchasing a different set of rights, one of which is that you will not be denied boarding unless a flight is cancelled. In general, airlines do a horrible job of communicating this sort of information to customers.
3. If you’re flying on an aircraft with a first class cabin, the majority of the business travelers you see on the standby list are waiting for an upgrade to first class, not a seat assignment.
4. If you think an airline is losing money paying off bumped passengers, think again. The differential between the payoff to the “bumpee” and last minute ticket price doesn’t even scratch the surface because it ignores the no-show rate, which is fairly, if not perfectly, predictable. An airline that oversells it’s cabin is selling 80-100 extra tickets for every passenger denied boarding.
Being bumped involuntarily and volunteering to give up your seat are fundamentally different situations. The latter is the market at work (although United in particular could work to remove the friction from the transaction so the damn plane wouldn’t be delayed 45 minutes while they find the volunteers forcing me to miss my connection).
I agree with an earlier commenter – involuntary bumping ought not be allowed (and most certainly should not be price capped by government)
I am not at all sure this is a problem. If I bump you to another flight so I can sell your ticket to a higher bidder,
am I not losing revenue on the flight you are shifted to? Unless, that is, the second flight is underbooked for some reason. You gain revenue in the morning, and lose it in the evening.
The rules are here. There are no maximums or minimums for voluntary bumping. (In my experience, the standard compensation was always a voucher for a free round-trip ticket anywhere in the continental U.S., with a few restrictions that I never found troublesome.) For involuntary bumping, what you’re entitled to depends on how late you are, up to 200% of your fare or $400, whichever is lower.
I almost always love being asked to take a later flight. I rarely have to be anywhere at a specific time on days when I fly, and for a free ticket that could cost $350 or $400, the hourly compensation is just great.
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