Overbooking on Flights: A Profitable Game of Chance

Aashay Verma, Class of 2019

(This was originally published in January 2017)

Flying is the safest mode of transport. According to The New York Times, a traveller could fly everyday for 123,000 years and still be safe. In India, air travel is gaining popularity, with 300 Million people in the middle class that can afford at least one trip a year. According to Airports Authority of India, the passenger traffic between April-November 2016 was more than 170 Million, both domestic and international. This figure was up by a little more 19% over the same period in 2015. The Government, too, is taking measures to expand air travel in the country. It had announced a project to build “low cost, no-frills” airports in Tier-II and Tier-III cities to enhance connectivity, and earmarked Rs.1500 Crore for the same.

Airlines regularly overbook their flights in an attempt to maximise efficiency. They give out more tickets than there are seats in the flight. They take such a chance because they know that there will be some passenger who won’t turn up for the flight. They make some extra bucks because of this. In the event that their estimation backfires and more passengers turn up than estimated, they have pay the passenger compensation either in cash, airline vouchers and sometimes even meals or hotel accommodation to pay for the “inconvenience caused.” The compensation often amounts to more than the cost of the ticket itself. Why will any airline overbook a flight then? There’s a mathematical explanation:
 Let’s take the cost of a ticket to be Rs. 5,000 (non-refundable) and the compensation amount to be Rs. 10,000. For the sake of simplicity, let’s assume that all the passengers are travelling alone, i.e. no one has come with their families. 
 If there are 180 seats on an aircraft, and the airline has estimated that 15 passengers won’t show up
 If the airline sells 180 seats, its revenue is: 
 5,000*180 = Rs. 9,00,000, and the flight takes off with 15 empty seats.
 If the airline sells 195 seats, its revenue is:
 5,000*195= Rs. 9,75,000, and the flight takes off with no empty seats. 
 Clearly, overbooking has caused the airline’s revenue to increase considerably. However, this is the best case scenario, when the airline’s estimate is accurate.
 What if all 195 passengers turn up?
 Revenue= Rs. 9,75,000
 Penalties= 10,000*15= Rs. 1,50,000
 Net Revenue= Rs. 8,25,000. This is the worst case scenario. The airline ends up with revenue lesser than if it had sold exactly 180 tickets also. 
 Why take this risk though? Airlines don’t take such decisions at random. Parsing through years of passenger flight statistics, they use computers to determine how many extra tickets to sell in order to maximise the revenue. Legally, airlines are allowed to sell seats up to 15% above the aircraft’s seat capacity. This often backfires though. Data suggests that in November 2016 alone, more than 2,100 passengers had to be “bumped” off their flights despite having confirmed tickets. Among the worst affected airlines were Jet Airways, with a little over 1600 cases, SpiceJet (434) and Air India (106), according to a report by Directorate General of Civil Aviation (DGCA). This turns out to be a costly affair. In November alone, airlines had to pay a little of Rs. 84 lakhs to passengers as compensation. 
 Another problem that exists is that people aren’t aware of their rights, allowing airlines to get away without compensating passengers. With a growing number of people starting to use air transport and new airports coming up all across the country, it is important to educate everyone about their rights as fliers. Let’s generate wider awareness about safest mode of transport in the world.