After a viral video emerged this week of United Airlines (UAL) dragging a paying customer off a plane, some outraged consumers attacked the airline industry’s practice of overbooking.
Not all airlines overbook, with JetBlue (JBLU) being a notable exception. But most figure paying a few people to take the next flight is better than letting a seat go empty if somebody doesn’t show up.
Sunday, however, was a reminder that this doesn’t work all the time — airlines sometimes have to bump a paying passenger involuntarily. United makes this decision based on a number of factors including fare paid, frequent-flyer status, and time of check-in, as Rule 25 of United’s contract of carriage describes. (Though the contract doesn’t say anything about forcing off already-boarded passengers.)
Compensation for involuntary bumping is limited by federal regulations to 400% of a ticket price, or $1,350. However, airlines do not have limits to compensate volunteers. And with an auction, somebody will always volunteer—everyone has a price—if the auction is done correctly.
Every bumping could be voluntary with a well-run auction
“You could imagine all types of auctions being run here,” said Mohammad Akbarpour, a professor of economics at Stanford’s business school and a specialist in auctions. “You could ask people when they buy tickets how much are you willing to sell. You can run an ascending auction, or you can run a reverse descending auction.”
Airlines currently conduct an ascending auction, with gate agents yelling out offers to take a seat for $500…$600. But they could consider other options like a Dutch, or descending, auction. In that scenario, gate agents might offer offer $5,000 to bump. Many people would come forward, and the number would be lowered until the people left matched the seats required.
A third option could be a strategy that helped economist William Vickrey win the Nobel Prize, a second-price sealed-bid auction that’s one of the most efficient ways to sell something. In that scenario, passengers could put the number they’d accept to sell their reservation when they buy tickets. If the flight gets overbooked, the passenger with the lowest bid would get bumped.
Bob Crandall, former chair of American Airlines, told Yahoo Finance the industry is constantly examining different ways to improve how it runs bumping auctions. But on the whole, he says, things are pretty good. “You’re at a point that 90% [of bumpings] are voluntary,” he said. ”Now the trick is to refine the auction processes to get the involuntary still lower. They’re much better at it today, and there are a lot more sophisticated auction ideas.” According to Crandall, airlines like Delta are looking at Vickrey-style options.