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What is overbooking in airlines industry and why do airlines apply it? - By Ahmed Haouaria

What is overbooking in airlines industry and why do airlines apply it? - By Ahmed Haouaria

13 Mars 2020
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It is a fact: some passengers have the unpleasant surprise of being denied at the boarding gate due to "overbooking". What exactly is overbooking and why do airlines use it? To optimize the filling of planes and overcome possible last-minute flight cancellations and cancellations, most airlines practice overbooking. Indeed, according to the Algofy site, nearly 5% of passengers cancel a trip each year. The approach, therefore, consists in offering more seat capacity for sale than there is actually on a flight and thus achieving an occupancy rate close to 100%, depending on passenger cancellations. “The flight management system, called“ yield management ”, is used by all the major airlines in the world to better calibrate over time, according to the reasons and requirements of customers, and balance between supply and demand.

Overbooking: a direct consequence of yield management

The air transport sector is the first to have used yield management to optimize its business profitability. By adjusting their rates according to the load factor, the airlines steadily increase the number of passengers carried. The explosion of Internet sales, which allows adjustment to demand in real-time, has accelerated the development of yield management: this is how the prices of a flight ticket can be higher at certain times. All airlines use yield management, at varying levels of sophistication. The major traditional companies, with complex pricing offers, use the great resources - human, in particular, with teams of yield managers - to adapt their prices while remaining consistent. Low costs, even with simpler fare ranges, apply more aggressive methods.

Among the risks is overbooking. Knowing that a certain number of passengers do not show up for boarding on the day of the flight, the airlines anticipate this percentage, generally based on flight history, previous reservations made and canceled, seasons, and other decision-making criteria; by selling more places than they have. An overbooking practice which sometimes leads to refusing passengers on board the plane, who are fully compensated and routed on the next flight. Another risk is that of the unsatisfied passengers who would notice the difference in fares practiced while chatting with their flight neighbors. Several price segments could be applied on the same flight.To avoid this kind of embarrassing situations, companies most often segment the aircraft according to the paid prices. Overbooking is, therefore, a direct consequence of "yield management" or "revenue management strategies used for the airline sector but also in the hotel sector; a practice which is now very popular and which often causes inconvenience to airline travelers and tourists. 

The practice of overbooking is in no way illegal. 

This is what we can read on the official website of the French administration:

“An airline company may sell more tickets than seats available on the plane. In this case, you cannot board and you are the victim of a denied boarding which implies compensation ”. 

Below is Emirates policy:

What will I receive as compensation if I’m not accepted on my flight?

''We’ll give you a confirmed seat on the next available flight to your final destination. That’s in addition to a voucher that you can redeem for a complimentary return ticket on selected Emirates routes.Denied boarding compensation rules may differ depending on the local regulation. If you have a Denied Boarding voucher, you can redeem it for a flight only after you have flown your original flight bygetting in touch with us.''

''The journey you can book will depend on the journey you were taking when you were denied boarding. If you can find your journey listed in the table below, you can redeem your Denied Boarding voucher for any of the flights also listed as long as it is on an Emirates operated route. However, depending on your voucher type, you may be able to book a trip listed in another table. This is outlined in the Voucher options summary table at the bottom of this page''.

History and evolution of Yield Management

American airlines were the pioneer of Yield Management in the 1980s.

Yield Management was born in the United States in the early 1980s with the deregulation of air transport.

The major American airlines have indeed had to face a new highly competitive environment created by the distribution possibilities offered by the new distribution systems: GDS (Global Distribution System) and by the entry on the airlines market of low-cost airlines in particular People Express which had operating costs less than half that practiced by "majors": (American, Delta, United, TWA ...). From the 1990s, the practice of Yield Management developed in many other sectors of activity.

Yield Management, which was consecrated in the airline industry, entered other sectors of activity first in the United States and then in Europe.

 The breakthrough of Yield Management goes hand in hand with the development of electronic distribution.

The art of offering the right volume of seats, at the right price, to the right customer and at the right time

The concept of yield management is to offer a relevant mix with the right volume of seat capacity, at the right price, to the right customer at the right time. This is to summarize a strategic tool that optimizes sales and therefore the profits of the company. The airline must first assess its competition and the prices charged to offer prices that are, if possible, competitive or at market prices.

Then airlines have to segment the appropriate customers and assess what price the targeted customer is likely to accept. Once evaluated, the company will divide its number of seats for sale into several separate prices. The first places on sale are the cheapest (usually small budgets who plan their vacations far in advance), and the less there are the more the prices increase. To sum up: first, come are first served.

Many are still convinced that if they wait until the last minute, prices will drop and companies will sell out. This is wrong. The more you proceed at the last moment the more expensive it is; indeed if the companies all lowered their prices just before the flight, the customers would not buy their seats until the last moment which would have a damaging effect on the seat management in the flights. Sometimes it happens but it's exceptional!

What does all this have to do with overbooking?

It turns out that many passengers do not show up at the boarding gate, a no-show in airline terminology, for many reasons: personal delays, last-minute sickness and some, even if they know that they will not travel, do not advise about it and cancel their scheduled flights. They, therefore, block places for potential sale and available capacity. 

All these no-shows are therefore lost seats for airlines and therefore, always to maximize sales and continue to offer attractive prices, the airlines decide for certain flights to sell more seats than actual availability.

This is not done randomly. Yield management is afully-fledged department within airlines. Studies are constantly done to assess how many additional seats can be sold. There are several types of methods, one of which is to study the figures for years.

A passenger can be denied boarding for several reasons

  • Commercial overbooking: what we explained in the previous paragraph; too many seats have been sold compared to the actual availability of the aircraft.
  • Some may also be denied access to the plane for safety reasons on board: a crew member is sick with too many passengers compared to the regulatory requirement which requires a specific number of cabin crew for a specific number of passengers on board to handle emergencies including evacuations. In this case, passengers may be refused to board.

Some passengers may also be refused at the boarding gate for other reasons: invalid ID, aggressive behavior, drunkenness, a mismatch between the name of the ticket and the ID, etc. This is not considered overbooking!

Passengers denied boarding against their will not only be compensated at the rates set by the regulations but also be offered the choice between a refund of their purchased ticket or a re-routing.

If the carrier can offer passengers alternative flights that allow them to arrive at their destination at a time close to the originally scheduled arrival time, compensation rates may be reduced.

When on a flight, overbooking has been carried out, the airline company asks if there are voluntary passengers to give up their reservation in exchange for a sum of money or other services to be agreed between the volunteers and the airlines.

 

 

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