Overbooking is the business practice of selling more reservations for a service than there is available capacity. While most commonly associated with airlines, it is a calculated strategy used across several service-based industries. This approach is based on the prediction that a certain number of customers will not use the service they paid for, allowing companies to manage potential financial losses.
The Reasons for Overbooking
The primary motivation for overbooking is to maximize revenue by minimizing unused inventory. For an airline, every empty seat on a flight represents lost income that can never be recovered once the plane departs. To counteract this, companies sell more tickets than there are seats to offset the predictable number of “no-shows.”
This is not a random guess; it is a sophisticated analytical process. Airlines and other companies employ complex algorithms to forecast the no-show rate for any given service. These algorithms analyze historical data, considering factors like the specific route, time of year, and type of traveler.
By creating a detailed predictive model, a company can estimate how many passengers are unlikely to appear. They might determine that a specific flight has a 5% no-show rate and will oversell the flight by that margin. When these predictions are accurate, the flight departs with a full cabin.
The Process of Selecting Passengers
When an airline’s overbooking predictions are incorrect and more passengers check in than there are available seats, a process is initiated. The first step is for gate agents to ask for volunteers willing to take a later flight in exchange for compensation. This seeks passengers with flexible travel plans.
If not enough volunteers come forward, the airline must resort to involuntary denied boarding, or “bumping.” Each airline has its own established criteria for deciding who will be bumped, though these policies must not be discriminatory. The selection is based on a hierarchy of factors. One common factor is check-in time; passengers who checked in last are often the first to be selected. Another is the fare class of the ticket, as passengers who purchased lower-priced tickets are more likely to be denied boarding. Frequent flyer status also plays a role, as airlines prioritize their most loyal customers.
Passenger Rights and Compensation
When a flight is overbooked, passenger rights are protected in the United States by Department of Transportation (DOT) regulations. When the airline seeks volunteers, the compensation is negotiable and can include travel vouchers, cash, or hotel accommodations.
If there are insufficient volunteers, the airline proceeds with involuntary denied boarding. At this point, passenger rights and compensation become federally mandated. Any passenger who is involuntarily bumped is entitled to a written statement explaining their rights and how the airline decides who to bump.
According to DOT rules, compensation is determined by the length of the delay to your final destination.
- If the airline gets you to your destination within one hour of your original arrival, no compensation is required.
- For domestic delays between one and two hours (or one to four for international), compensation is 200% of the one-way fare, capped at $775.
- For domestic delays over two hours (or four for international), compensation is 400% of the one-way fare, capped at $1,550.
This compensation must be offered in cash or by check, though passengers may accept vouchers of a higher value.
Overbooking in Other Industries
The practice of overbooking extends beyond the airline industry. The hotel industry is a prime example, where an empty room is a permanent loss of income. Hotels analyze data on cancellations and no-shows to determine how many extra rooms to sell. When overbooked, a hotel will arrange for excess guests to stay at a comparable nearby hotel, covering the cost.
Restaurants also engage in a form of overbooking for table reservations. By accepting more reservations than they have tables, they can keep their dining rooms full and optimize nightly revenue, a common practice in high-demand establishments.