Regulation

A Simple Way to Ease the Pain of Airline Overbooking

Lift the limits on what airlines pay to involuntarily bumped passengers.

Candidates for bumping.

Photographer: Joe Raedle/Getty Images

Something good might come of the horrible incident involving United Airlines, in which a passenger was forcibly evicted to make room for airline personnel. The Department of Transportation, working with the major airlines, should substantially increase the compensation given to passengers involuntarily bumped because of overbooking.

By itself, overbooking is not objectionable. Sometimes passengers miss flights because of late connections. Sometimes they just don’t show up. Most airlines occasionally overbook.

Usually that doesn’t hurt anyone. Overbooking has probably allowed you to get on flights on which carriers would not otherwise have been able to seat you.

Even when people with reservations are denied boarding, it isn’t so bad. The vast majority of the time, those who are denied boarding come away happy, or happy enough, because they find themselves adequately compensated for the trouble (with a substantial voucher). In 2015, for example, more than 500,000 people were voluntarily denied booking on the largest U.S. air carriers, because they agreed to the compensation that the airline provided them.

The problem comes when the airline cannot find anyone who will accept the offered compensation. In 2015, 46,000 passengers fell in this category. That’s a trivial percentage of annual travelers, and it’s much lower than the recent high of 67,000 in 2009. But it's still a lot of people.

The real question, of course, is what kind of compensation those people should receive. Until 2011, the amount was far too low. Bumped passengers were entitled to cash equal to the value of their tickets, with a ceiling of $400, if the airline could get them to their destination within two hours. The travelers were entitled to double the price of their tickets, up to $800, if they were delayed more than that.

In 2011, the amounts were significantly increased. Under the new rule, bumped passengers facing delays of two hours or less get compensation equal to double the price of their tickets, up to $650, while those subject to longer delays get payments of four times the value of their tickets, up to $1,300. (Disclosure: As administrator of the Office of Information and Regulatory Affairs, I was involved in overseeing that regulation.)

That's an improvement, but the amounts are still too low. For many passengers, being bumped is far worse than an inconvenience. It means that they will miss a wedding, a family celebration, the start of a romantic vacation or an important business meeting that cannot be rescheduled. (I know two people who were involuntarily bumped from a flight that was supposed to begin their only vacation of the year -- and who could not find any alternative flight during the relevant week.)

True, $650 and $1,300 are a lot of money, but for some passengers, those amounts are not nearly enough. What’s worse, many airlines do not offer cash compensation unless passengers explicitly demand it; instead, they just give people the same voucher given to those who are voluntarily bumped.

In 1968, economist Julian Simon offered an ingenious solution. Whenever planes are overbooked, airlines should run an auction, in which passengers specify the lowest amount they would accept to be bumped, and airlines take the lowest bidders.

Simon’s approach would have the advantage of ensuring that passengers would not be bumped unless the compensation was adequate by their own lights. And indeed the current system of voluntary bumping (which starts with low offers, which increase if no one accepts them) draws on his proposal. But a full-scale auction would be difficult to administer, not to mention confusing and stressful for people who are just trying to get from one place to another.

Here are two simpler proposals.

First, the Department of Transportation should make it clear that the figures in the 2011 regulations are just the minimum, and that airlines are free to give higher amounts to involuntarily bumped passengers. That approach would have the advantage of allowing a kind of market competition.

Second, the department should initiate a new rule-making process, asking for public comments on a different approach. The simplest option would be to eliminate the $650 and $1,300 maximums, so that involuntarily bumped passengers get double the cost of their ticket for short delays, and quadruple the amount for longer delays. Another possibility would be to include legal floors, so that passengers would get (say) at least $600 for short delays, and at least $1,200 for longer ones.

Would the higher amounts have unintended consequences? Perhaps they would lead airlines to reduce overbooking -- a change that would be beneficial for some passengers but harmful for others (who get reservations only because of the practice of overbooking). But it is a lot worse to be bumped than not to get a reservation in the first place.

If compensation for involuntary bumping is increased, airlines might respond by increasing some other price -- for example, the price of tickets. But because the number of involuntarily bumped passengers is so low, and because airline revenues are so high, it is doubtful that any such response would be significant.

In recent years, the Department of Transportation has issued a number of passenger protection rules -- increasing transparency about fees and delays, banning post-purchase fare increases, and requiring airlines to provide food and water for long tarmac delays. While there is some grumbling about some of them, the changes have proved immensely popular and generally worked well.

It would be a modest but real step forward to increase compensation for involuntary bumping -- and thus to provide a little help, every year, to tens of thousands of badly inconvenienced travelers.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Cass R Sunstein at csunstein1@bloomberg.net

    To contact the editor responsible for this story:
    Katy Roberts at kroberts29@bloomberg.net

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