Overbooking - Friend or Foe?

What is overbooking? Although the term sometimes evokes a negative emotion, it is a core component of effective revenue management whereby the bottom line is enhanced through maximizing utilization of available space. It is a practice that is widely prevalent in everyday life. For e.g.: Doctors sometimes overbook appointments to accommodate the possibility of some patients not showing up. Restaurants do the same for reserving tables and so on. In the transportation space, overbooking is the practice of selling more seats than capacity in order to compensate for no-shows and cancellations. Airlines typically indulge in this practice in order to minimize lost opportunity by selling seats that would have otherwise gone empty owing to passenger no show rates.

Overbooking practices are typically implemented only in economy cabins as denying boarding to a premium first or business cabin passenger who happen to be their most profitable customers is a risk that most airlines are not willing to take. Given the sensitive nature of overbooking and the prospect of dealing with potential denied boardings, overbooking levels are not set randomly by airlines and involves the usage of historical showup patterns along with sophisticated modeling techniques. These models have the objective of not only maximizing utilization and hence the load factor, but also minimizing the  risk of a denied boarding. Getting the overbooking number wrong typically results in potential revenue downside to airlines in the form of vouchers along with the intangible effect of creating passenger ill-will. In spite of these models, depending on the market and scheduling criteria, passengers denied boardings are not as rare as they should be.

Overbooking, when done the right way can boost airline revenues upto 2%. However, if mismanaged, it can lead to severe negative repercussions including one scene I witnessed at an airport where the overbooked passenger (who happened to be a police inspector) threatened to arrest the check-in agent for not letting him board the aircraft. When a flight is overbooked, airlines typically have voluntary oversales mechanisms which are set in motion where passengers are incentivized to give up their seat and be reaccommodated on alternate itineraries in exchange for a travel voucher.

Overbooking in the cruise ferry space is not as prevalent as in the airline space.  The concept of leaving passengers in the port due to lack of space on the cruise ferry is quite alien and rightfully so, given that the schedules and frequency of sailings tend to be relatively limited. Having said that, cruise ferries are realizing that there is significant revenue being left on the table by not overbooking to compensate for cancellations and no-shows. Even though overbooking at the ship level is a no-no, cruise ferries are considering overbooking certain types of cabins with the understanding that if everybody shows up for that cabin, then some may be upgraded/moved to similar cabin types.

Does your company overbook? If yes, what kind of challenges do you face? If not, is it something you are considering and trying to figure out how this could potentially improve the bottom line. If you need to discuss more about how overbooking could help your company, please don’t hesitate to contact me at Pradeep.bandla@rtscorp.com.

Pradeep Bandla

VP, Product Management and Marketing