Overbooking – What Is That And How Do Airlines Typically Solve The Problem (Without Violence)?

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In the past couple of days one term has gotten plenty of attention due to United’s very unconventional handling of such a situation: ‘Overbooking’ of flights.

We want to shine a little light on what overbooking actually means, who makes use of it and what is the typical way of dealing with customers in such a situation.

Despite many stories written about the circumstances surrounding the United Airlines flight where a paying passenger got dragged out of the plane by security and injured in the process, overbooking of scheduled services are a common occurrence in the airline industry and usually solved in an amicable way.

What is overbooking?

‘Overbooking’ [or Overselling] is a term that describes the practice of selling more inventory than a company has available, taking into account a projection of cancellations and no-shows for a certain product or service. This projection is commonly known as yield management and run by an algorithm, taking past experience values into account.

Example 1: A flight from Los Angeles to Chicago has 250 seats but it is estimated that until the day of departure 25 of these reservations will either get cancelled or passengers won’t show up for their flight. The airline therefore sells 275 seats, hoping they break even at the time of departure.

Example 2: A hotel has 500 Rooms and based on experience of last minute cancellations (especially of flexible rates and by corporate customers) they continue to sell beyond actual capacity until a few days before to make sure they don’t lose out in revenue.

Who overbooks?

Industries throughout the hospitality business constantly engage in overselling of their inventory. This includes airlines, hotels, rental car companies and bus tours.

What happens if overbooking isn’t breaking even as anticipated?

Every now and then there are actually more customers than available seats on an aircraft, rooms at hotels or cars at a rental car agency and then the company has a problem. They will have to explain the situation to the customer and in the worst case deny them the service as reserved in which case the customer is entitled to compensation and in many cases a refund of his purchase.

To avoid denying the customer a service outright at the last minute, companies often approach clients ahead of time throughout the day and offer them (in most cases) lucrative compensation if they voluntarily agree to surrender their reservation and agree to travel another day or using the service of a competitor with all expenses paid. Such compensation is typically issued in vouchers for the respective company good towards a future purchase but in some cases also includes cash compensation, especially where required by law such in the European Union based on Air Passenger rights per EC261/2004.

What type of compensation if typically offered?

The type of compensation offered can vary greatly based on the provider and the urgency of the situation. When it comes to an oversold flight the jurisdiction where the matter occurs is also important.

Here are a few offers I personally received in the previous 2 years on various routes for voluntary denied boarding, also known as ‘Taking a bump’ (giving up your seat):

  1. Delta Airlines Los Angeles to Detroit, flight oversold and the airline offered $800 in travel vouchers to fly 2 hours later (I accepted).
  2. Delta Airlines Los Angeles to Tokyo, flight oversold and Delta offered $1,200 in travel vouchers plus hotels and meals to travel the following day (I accepted).
  3. United Airlines Las Vegas to Los Angeles, flight oversold and got offered $300 in travel certificates to fly 4 hours later (I declined).
  4. American Airlines San Jose, CA to Los Angeles, flight oversold and American offered $600 travel vouchers to fly 5 hours later. I accepted but wasn’t needed as a volunteer in the last minute.
  5. Lufthansa Frankfurt to Vancouver, flight oversold and was offered a voucher good for 600 EUR cash to travel either the following day or on Air Canada via Calgary. I accepted, chose the Air Canada option and got the cash when presenting the voucher at the Ticket Counter.

What are my legal rights?

When purchasing a ticket you enter into a contract of carriage (COC) with the airline that has tons of fine print that 99% of the passengers will never read in their life. Nevertheless and regardless whats written in that COC, it can not trump federal law and regulations governing air travel in the respective jurisdiction. Airlines are therefore required to comply with the legislation in terms of passenger rights and compensation as applicable based on the situation.

Here are two legal provision, one for passengers in the United States based on U.S. Law and the other for passengers whose flights fall under the jurisdiction of the European Union.

This is the U.S. legislation:

14 CFR 250.5 – Amount of denied boarding compensation for passengers denied boarding involuntarily.

(a) Subject to the exceptions provided in § 250.6, a carrier to whom this part applies as described in § 250.2 shall pay compensation in interstate air transportation to passengers who are denied boarding involuntarily from an oversold flight as follows:

(1) No compensation is required if the carrier offers alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger’s first stopover, or if none, the airport of the passenger’s final destination not later than one hour after the planned arrival time of the passenger’s original flight;

(2) Compensation shall be 200% of the fare to the passenger’s destination or first stopover, with a maximum of $675, if the carrier offers alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger’s first stopover, or if none, the airport of the passenger’s final destination more than one hour but less than two hours after the planned arrival time of the passenger’s original flight; and

(3) Compensation shall be 400% of the fare to the passenger’s destination or first stopover, with a maximum of $1,350, if the carrier does not offer alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger’s first stopover, or if none, the airport of the passenger’s final destination less than two hours after the planned arrival time of the passenger’s original flight.

(b) Subject to the exceptions provided in § 250.6, a carrier to whom this part applies as described in § 250.2 shall pay compensation to passengers in foreign air transportation who are denied boarding involuntarily at a U.S. airport from an oversold flight as follows:

(1) No compensation is required if the carrier offers alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger’s first stopover, or if not, the airport of the passenger’s final destination not later than one hour after the planned arrival time of the passenger’s original flight;

(2) Compensation shall be 200% of the fare to the passenger’s destination or first stopover, with a maximum of $675, if the carrier offers alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger’s first stopover, or if not, the airport of the passenger’s final destination more than one hour but less than four hours after the planned arrival time of the passenger’s original flight; and

(3) Compensation shall be 400% of the fare to the passenger’s destination or first stopover, with a maximum of $1,350, if the carrier does not offer alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger’s first stopover, or if not, the airport of the passenger’s final destination less than four hours after the planned arrival time of the passenger’s original flight.

(c) Carriers may offer free or reduced rate air transportation in lieu of the cash or check due under paragraphs (a) and (b) of this section, if –

(1) The value of the transportation benefit offered, excluding any fees or other mandatory charges applicable for using the free or reduced rate air transportation, is equal to or greater than the cash/check payment otherwise required;

(2) The carrier fully informs the passenger of the amount of cash/check compensation that would otherwise be due and that the passenger may decline the transportation benefit and receive the cash/check payment; and

(3) The carrier fully discloses all material restrictions, including but not limited to, administrative fees, advance purchase or capacity restrictions, and blackout dates applicable to the offer, on the use of such free or reduced rate transportation before the passenger decides to give up the cash/check payment in exchange for such transportation. (See also § 250.9(c)).

This applies to involuntary denied boarding situations and therefore places a cash burden on the carrier to better find volunteers willing to give up their seats in lieu for vouchers rather than cash. Voluntary denied boardings are subject to whatever the parties agree to while passengers in involuntary scenarios are always entitled to cash payments within the framework above, especially when no timely alternative is offered.

The case is different in the European Union and those countries that adopted the EC261/2004 such as Switzerland and Iceland as can be seen by the passenger rights provided by Lufthansa (see here).

Denied Boarding

If in case of overbooking you are denied boarding involuntarily on a flight for which you hold a reservation, you are entitled to care and compensation without delay and to a refund as laid out in the previous section on ’delay’. In addition you are entitled to re-routing, under comparable conditions, to your final destination at the earliest opportunity.

Subject to availability of seats, you may instead choose re-routing to your final destination at a later date of your convenience, in which case you will have to bear yourself the cost of food, accommodation and transfer.

If you are involuntarily or voluntarily denied boarding, you have the right to an alternative flight or to a refund and compensation which can also be paid as a cheque, by bank transfer or, with your agreement, in the form of a voucher.

The compensation shall be paid in cash, cheque or transfer or with your agreement in form of vouchers. The amount of the compensation depends on the distance of the schedule flight or the alternative flight proposed to you. Compensations amount to:

  • 250 € for flights up to 1.500 km
  • 400 € for flights between 1.500 km and 3.500 and intra-Community flights of more than 1.500 km,
  • 600 € for flights of more then 3.500

If you are offered an alternative flight, the scheduled arrival time of which does not exceed 2 hours in respect of flights up to 1.500 km, 3 hours in respect of flights between 1.500k m and 3.500 km as well as intra-Community flights of more than 1.500 km, and 4 hours in respect of all other flights, the above, mentioned compensation amounts can be reduced by 50%, i.e.125 €, 200 € and 300 €.

These rights are not granted if you have been denied boarding on reasonable grounds, such as reasons of health, general or operational security, or inadequate travel documentation.

The EU regulation generally covers passengers with a blanket cash entitlement for many scenarios including denied boarding and delay situations. I myself have claimed EU compensation many times successfully. Sometimes it requires a bit of a push, the involvement of an ombudsman a regulator complaint or even an attorney but well founded cased will usually yield in full compensation being paid.

Conclusion

I don’t want to chew around on the United incident any longer which was more than unfortunate and will cost the company a pretty penny in both compensation, image, market capital and PR damage control.

What’s more important is that passengers know their rights and even if the airline undermines their passenger rights at the very given moment to take them on later in court and through a complaint to the Department of Transportation. It rarely serves anyone to start a fight with these people, better collect your cash award in the end.

I said it before when writing about a previous case involving a downgrade on British Airways that airlines and their personnel often prey on weak passengers such as foreigners with little language capability, elderly, youths and anyone who doesn’t really know how to defend themselves in such a scenario to get them downgraded or bumped off a flight with very little argument.

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