A voice over the intercom said, “The reward is now a ten-thousand-dollar voucher”.
There were some quiet stares at the terminal while we looked around for the anonymous person who seemed unmoved by the growing sums. To our surprise, a man dressed in a suit casually walked to the counter and collected his reward. We could now board the plane.
This was how United used to handle overbooked flights.
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It’s become common knowledge that every major airline overbooks their flights to maximize their expected revenue. Airlines want to protect themselves from passengers cancelling their reservations. In the rare scenarios when there are no cancellations, most airlines try to incentivize people to take a different flight.
For United, this used to mean open descending-bid auctions like the one I witnessed. In this format, the airline would act as the auctioneer, and the good being auctioned would be a bundle compromising of the flight-change-compensation and the new flight. The auctioneer would start the bidding by listing a high “price” — meaning low compensation in exchange for a new flight. The auctioneer would continually lower the “price” (by increasing the compensation offered or improving the replacement flight) until a bidder came forward.
But in the last two years, United has unveiled a new approach. At United’s check-in kiosks, a person is presented with other flights and preset bids for these flights. People simply have the option to choose which bid to make and whether they want to make a bid at all.
Making the system entirely digital gives the auctioneer the most information. The airline can see every passenger’s “willingness to sell” their flight. Those who are less willing might require more generous vouchers, and some might not participate at all. Naturally, the airline can make globally optimal choices on who to award a voucher to and how to update the preset bids available to the passengers.
While this system is convenient and potentially less intrusive to passengers, it will always result in passenger compensation that is less than or equal to the compensation from a public auction. The seller gets exposure to all the passengers, and the passengers have more potential to disclose aggressive bids via a private platform.
The United State requires all airlines to make overbooking policies transparent to people purchasing flight tickets. Every airline must pair each ticket sale with a notice that reads:
“If a flight is overbooked, no one will be denied a seat until airline personnel first ask for volunteers willing to give up their reservation in exchange for compensation of the airlines choosing”. If there are not enough volunteers, the airline may deny boarding to other persons in accordance with its particular boarding priority.”
United’s method of dealing with overbooked seats will probably ensure that no one is “denied boarding” because well-designed auctions help markets clear. The individuals who agree to give up their reservations are likely worse off, but at least United won’t have another PR disaster.