overbooking

Overbooking itself is an airline industry staple.  It’s also a sensible practice.

That’s partly because there’s always someone who doesn’t show up for a flight.  For example, business people who travel often may book seats on three or four different flights to their next destination on a given day.  No matter what time their morning client meeting ends they’ll be able to get away easily.  They just cancel the ones they won’t use as the day develops.

operating leverage = large profit for the last seats sold

A plane that takes off with unused seats is a lost revenue opportunity.  Like unused hotel rooms, there’s no way to sell them later on.  And both hotels and airlines have a ton of operating leverage–there’s maybe $10 in marginal cost associated with an incremental seat/room.  So the profit contribution left on the table from non-use is immense.

UAL’s overbooking algorithm

I’ve noticed with UAL, which I’ve used regularly for years, that all of the last half-dozen or so flights I’ve been on recently have been overbooked.  That’s after seeing maybe one overbooked flight in the prior year.

My (unscientific) guess is that UAL tweaked its overbooking algorithm a few months ago in an effort to squeeze a bit more profit out of its flights.

My experience is that when companies begin to operate by trying to figure out where the the line is that marks the minimum a customer will accept–and then tries to get as close to that line as possible without crossing it, disaster inevitably happens.

I first encountered this phenomenon with a former management at Marriott that later went on to wreak havoc at Disney and at Northwest Air.  Their idea was that no one would notice if they lowered the room ceilings on newly-constructed hotels by an inch or two and shrank the room square footage by, say, 5%.  Yes, construction costs were a bit lower.  But I remember those rooms as being vaguely unsettling when I entered.  Business customers, the heart of a hotel chain’s profits, fled in droves.

If I’m correct, the remedy for UAL is simple.  Just go back to the former algorithm.  If, however, the corporate culture at UAL is to provide customers with the minimum acceptable service–and, to be clear, I don’t know that it is–more trouble is likely brewing.