The Homa Files

Answer: Probably a long, long time ago.

About 1 in every 5,000 passengers … about 100,000 people each year.

Doesn’t sound like a lot to me.

Still, the Feds are up in arms about it.

* * * * *

WSJ: Auctions for Overbooking, June 8, 2010

The Department of Transportation has announced new rules for airlines to compensate passengers who are involuntarily bumped from an oversold flight.

The feds want to raise payments for those involuntarily bumped to $600 from $400 for short delays and to as high as $1,300 from $800 for lengthy delays.

We have a better idea — or, more precisely, the late economist Julian Simon had one 30 years ago.

In the 1970s, Simon proposed an auction system in which airlines would offer passengers on overbooked flights a gradually rising reward for giving up their seat.

For example, if 115 passengers showed up for a flight with 100 seats, the airline would start to offer, say, a $300 voucher to passengers who agreed to take a later flight. If there weren’t enough takers at $300, the airline would increase the offer to $400, then $500, a free round trip ticket, etc., until 15 passengers volunteered.

Auctions like this are highly efficient ways of allocating a scarce resource.

Starting with American Airlines in the late 1970s, a version of the proposal was widely adopted. Studies demonstrated that airlines saved money and the rate of bumping was reduced by more than 80%.

So why are there still so many involuntary bumpings?

Because many airlines offer one take-it-or-leave-it deal — say, a $500 voucher — and if there are not enough takers, the random bumping begins.

A real auction would prevent this and optimize the welfare of all parties. Those who take the payment for a later flight are better off because they have freely chosen this option. Passengers who cannot afford at nearly any price to miss the scheduled flight are guaranteed a seat.

The airlines also benefit because an auction may save them money over a set price or a government penalty.

Full article:
http://online.wsj.com/article/SB10001424052748703303904575293011757655060.html?mod=WSJ_Opinion_LEADTop

This entry was posted on June 11, 2010 at 6:38 am and is filed under Airlines. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.