Overbooking and Passenger Compensation after the United Fiasco

chris-christie

In the aftermath of the April 9 incident in which police dragged a passenger from a United plane, New Jersey Governor Chris Christie has “asked the Trump administration to stop overbooking until we set rules how the airlines can conduct themselves.”

For the sake of airline passengers, let’s hope the federal government does not take Christie’s request seriously.

As I’ve pointed out, airlines do need to clarify their terms of service and better advertise them to customers. Beyond that, it is up to individual airlines to treat customers in such a way as to win people’s business. In response to widespread outrage, United already is instituting changes; CEO Oscar Munoz apologized for the incident and promised a “thorough review” of United’s practices.

Government should get involved only if it reasonably deems that United violated its contracts with passengers (a debatable question); after all, people have a right to freely assent to the terms an airlines offers. Assuming that airlines and passengers mutually agree to a contractual arrangement, government should play no further role. Paying customers even in our semi-free market are ably equipped to punish bad actors by withholding their business, as they continue to punish United. Government shouldn’t interfere with people’s agreements, and generally it imposes harm when it does so.

Even those who think that government must tightly regulate business should grant that it would be foolish to push for a ban, even temporary, on overbooking, for a ban would immediately increase airline ticket prices. Even regulation advocates should recognize that a softer touch—say, a ban on forcibly removing passengers after they are seated—would address the problem at hand without substantially disrupting the airline industry.

What else can we learn from the United debacle? In what follows I’ll touch on a number of issues related to overbooking in the airline industry and the related matter of offering compensation to passengers who are bumped.

The Practice of Compensating Passengers

Once United staff figured out they needed to squeeze four crew members onto a booked and seated flight, they tried to buy passengers’ cooperation. According to the New York Times, United offered first $400, then $800, then $1,000 to passengers to leave the plane “voluntarily” (this is a key term here, as we’ll see). No one “volunteered,” so United’s staff selected four people to be “involuntarily” deboarded. (It’s unclear to me how these four people were selected; was it truly random or solely at the discretion of United staff? Update: A United spokesperson told BBC that “frequent fliers and higher fare-paying passengers are given priority to stay aboard.” One person present said that staff “used a computer to randomly select four passengers,” but this was once the pool was narrowed.) “Four passengers were selected to be bumped, and three left without incident,” United spokesperson Charlie Hobart told the Times.

David Dao did not leave without incident. He left carried by police, bloodied and screaming, and video recorded for the world to see.

The obvious question is why United did not offer more in compensation. The widespread view (which I share) is that United was idiotic in not doing so. My guess is United staff wouldn’t have had to go above a couple grand or so, times four passengers, to get people off the plain. To save on the order of $10,000, United enraged airline passengers nationwide. As I noted on Twitter, this public-relations disaster will be studied for years.

How widespread is the practice of bumping passengers? Again from the Times:

[I]nvoluntarily bumping passengers is rare. In 2016, United involuntarily denied boarding to 3,765 of its more than 86 million passengers on oversold flights, according to the Transportation Department. An additional 62,895 people voluntarily gave up their seats.

Not moving this one passenger from the “involuntary” to the “voluntary” category probably will end up costing United tens of millions of dollars, not counting the heavy hit United stock took.

Meanwhile, United’s competitors get free publicity over the matter, as with the headline “Why Delta Air Lines Paid Me $11,000 Not To Fly To Florida This Weekend.”

After reading a newly recirculated 2015 story from PBS, “How Delta masters the game of overbooking flights,” I’m floored that United did not follow Delta’s practices in this regard.

Delta lets passengers choose, at the point of check-in, how much they’ll accept to be bumped, explains Max Nesterak, the author of the PBS piece. (I don’t know whether Delta consistently practices this policy.) This is a brilliant strategy, because it lets passengers buy into the idea of getting bumped, put a dollar value on the hassle of getting bumped, and essentially prioritize themselves. Obviously Delta first bumps and compensates passengers who pick the lowest values.

As a consequence, “only three of every 100,000 Delta passengers were bumped involuntarily” in 2014, Nesterak notes, compared with 11 for United.

I checked with the October–December, 2016, statistics: Delta involuntarily bumped only one passenger per 100,000, while United involuntarily bumped four (bear in mind this is only for a quarter). It’s worth noting, though, that Delta had relatively more voluntary “denied boardings.”

It’s also worth noting that, in the same quarter, the number of involuntary to voluntary “denied boardings” for all U.S. airlines was 8,955 to 106,723. And the number of of “denied boardings” (voluntary and involuntary) to “enplaned passengers” was 115,678 to 164,615,313. That’s a ratio of around 1 to 1,400—so let’s not exaggerate the scope of the problem.

How do Federal Regulations Relate?

Regulation 14 CFR 250.5 defines the “amount of denied boarding compensation for passengers denied boarding involuntarily.” The limit is set at 400 percent of the fare, at a maximum of $1,350, in cases of substantial delay.

Initially I was confused about the meaning of “involuntary” here. If an airline says, “We’ll offer you a given number of dollars to leave the plane—and if you don’t leave we’ll make you leave”—that counts as a “voluntary” deboarding, assuming the passenger accepts the offer. If the airline makes you leave without you accepting a prior compensatory offer, then that is “involuntary,” and in that case the airline must compensate you according to the regulations. (I had to correct my previous article because of my erroneous interpretation of this.)

Thankfully, someone on Facebook pointed me to an article by Business Insider, which in turn cites the Department of Transportation:

DOT has not mandated the form or amount of compensation that airlines offer to volunteers. DOT does, however, require airlines to advise any volunteer whether he or she might be involuntarily bumped and, if that were to occur, the amount of compensation that would be due. Carriers can negotiate with their passengers for mutually acceptable compensation.

Given this framework, it seems clear why the federal government requires compensation in cases of “involuntary” deboarding; the idea is to ensure that passengers who are bumped are compensated.

Ironically, though, this regulation may sometimes have the opposite of its intended effect. Absent the regulation, airlines would have to set their own policies for compensating passengers voluntarily and involuntarily deboarded.

As I’ve argued, airlines should be free to set these policies, and customers should be free to accept them or not. Absent the regulation, airlines would either set popular compensation policies or else notify people (hopefully very clearly) that involuntarily deboarded passengers would get no compensation. Absent clear buy-in from customers in exchange for lower ticket prices, this second option would be insanely unpopular.

Because of the regulation, some people at airlines might think, “We’ll lose a maximum of $1,350 if we involuntarily deboard a passenger, so we might as well not offer more than that to voluntarily deboard.” In other words, the regulation may have the unintended effect of training some airline personnel to meet the requirements of the regulation, rather than meet the needs of their customers. It seems plausible that such thinking was at play leading up to the debacle of April 9.

Government has no need to set such regulations and no proper business interfering in the contractual relationships between airlines and passengers.

Another Test Case

The Los Angeles Times reports another case of a man getting booted off of a United flight. In this case, Geoff Fearns was not physically dragged off the plane, but he was threatened with arrest if he didn’t leave.

But in this case United had a pretty good excuse for cutting back the number of passengers:

Apparently United had some mechanical troubles with the aircraft scheduled to make the flight. So the carrier swapped out that plane with a slightly smaller one with fewer first-class seats.

But, as indicated above, obviously United could have done something far better than threaten the man with arrest.

The Genius of Julian Simon

The Wall Street Journal notes:

The economist Julian Simon wrote on these pages in 1977 (and we repeated in 2010) that the way to handle overbooking if too many passengers show up for a flight is to hold an auction. Treat the seat shortage like a market to persuade people to give up their tickets voluntarily. Offer passengers compensation in gradually rising value until enough volunteers give up their seats.

As the Journal discusses (and as noted above), Delta does a better job instituting Simon’s advice than United does.

Doherty also discusses Simon’s role in devising auctions to solve problems of overbooking.

A Sense of Context

I offer a few concluding thoughts here.

  • Yes, United screwed up badly. But let’s remember that in 2016 United also helped some 143 million people get to where they were going quickly and economically, and, mostly, even pleasantly, at least when compared to alternate modes of transport. And other airlines reportedly do an even better job of serving their customers.
  • As I’ve indicated, the federal government does some things to needlessly limit airline competition. Why don’t we fix that to address the “asymmetry of power” that (even) National Review complains about?
  • While we’re at it, let’s free up supersonic planes (now in development) for domestic flights. There’s no technical reason for the government to outlaw them, yet it does.
  • People should be aware that overbooking comes with the benefit of reduced airfare. Also, the more generous airlines are with compensating delayed passengers, the higher the ticket prices. We face trade-offs.
  • However bad United’s customer’s service sucks, the TSA’s customer “service” sucks far more. TSA subjects people to daily abuses for the sake of security theater. So how come the popular discussion centers on the problems of business rather than the problems of government controls?
  • I don’t fly much, but I’ve personally noticed no difference in levels of customer service between different airlines. Whatever the differences between airlines, most people do not have problems.
  • We should also think about decoupling the airports from government controls and funding. Then airports, in conjunction with the airlines who contract with them, could determine security policies.
  • Most people have an astounding capacity to forget how fortunate they are in the modern world. Yes, point out that United sucks; and also look up at the sky once in a while and think, “Look! Airplane! How cool is that!” You do recall that people used to travel across the country in covered wagons, right?

Maybe United will have great customer service when pigs fly. But let’s not take for granted that human beings really can fly, and that’s an awesome thing.

Image (modified from the original): Gage Skidmore

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