May 2019, London
Europe's biggest event for commercial and digital travel execs
Come the revolution in airline overbooking
Tom Bacon takes look at the opportunity to reduce the cost of airline oversales
Overbooking received considerable attention last year when a United Airlines passenger was forcibly removed from a plane, even if, in the end, it actually turned out that overbooking wasn’t the culprit! Let’s face it, airlines began overbooking flights decades ago so it is something we have lived with for some time. The basic analysis is to compare ‘no-show rates’, the probability that customers will not show up for flights they have booked, versus the cost of oversales, or the cost of re-accommodating passengers on other flights. A high no-show rate will drive higher overbooking while a high cost of oversales will limit the recommended degree of overbooking. Flights may be overbooked by two to five percent as a result of algorithms that balance these two effects, adding two to three incremental passengers per flight.
The no-show rate is typically higher for passengers who purchase fully refundable fares – fares that permit the customer to change plans at the last minute without any penalty. High change fees, however, have now resulted in higher no-show rates for low fare passengers too. Low fare passengers may now find that a change in plans makes their tickets worthless; rather than advise the airline of their change in plans, they also may simply no-show. It behooves airlines to calculate no-show rates across different fares or types of passengers to develop more accurate forecasts for no-shows in optimising overbooking. Over the past decade, many systems have forecast no-shows on a more granular basis.
A significant opportunity for airlines exists to reduce the cost of oversales and two startups are helping.
1. Volantio is working with Alaska Airlines and other airlines to identify passengers who would be willing to move to other flights. Volantio will initiate offers to passengers deemed more flexible in their plans. Offers can occur days before the flight to move passengers ahead of the flight when it becomes clear that there will be oversales. Volantio can also initiate offers on the day of the flight after having identified the most flexible passengers. Volantio’s approach has been found to be much less costly – as well as much less cumbersome -- than the often-chaotic auctioning process at the gate.
2. Caravelo has designed a process for handling oversales that has been implemented for LATAM airlines. They refer to their process as ‘post sale optimisation’ as a supplement to normal revenue management. Like Volantio, their system identifies the most flexible passengers but combines this individual customer targeting with special incentives (‘Exchange Rewards’). Their objective is to resell the right product with the right incentive to the right passenger at the right time.
- Can be deployed before passengers get to the airport
- Allow carriers to continue to sell full flights as they simultaneously target already booked customers to move to alternative flights
- Can be initiated on the day of travel as the actual no-shows occur
- Lower the cost of re-accommodating passengers while also reducing the operational challenge at the airport.
Southwest Airlines famously eliminated overbooking last year in response to the United debacle – but they continue to experience significant oversales when they substitute smaller aircraft for larger ones. They, too, could benefit from processes like Volantio and Caravelo that reduce the cost – and hassle – of oversales.
Overbooking continues to become more sophisticated even decades after its initial implementation. Airlines are forecasting no-shows more accurately while also reducing the cost of oversales. If airlines can add even one more passenger per flight with these enhancements, it drives a significant increase in profits. But, as importantly, these improvements also translate into an improved customer experience – something every airline should be interested in.
Tom Bacon has been in the business for 25 years. When he isn’t penning his regular column for EyeforTravel, he is an industry consultant in revenue optimisation, and leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Want to find out more? Email Tom or visit his website