#53 1978 · US airlines · Aviationincentive-flip
US airlines stopped eating no-shows by overselling seats and buying them back with vouchers
the problem
Booked passengers vanished at the gate
background
Airlines routinely overbooked flights to offset no-shows, since a share of confirmed passengers simply never showed up and empty seats were pure lost revenue. When more ticket-holders showed up than seats existed, airlines picked passengers to bump involuntarily — often the last to check in — leading to public confrontations, lawsuits, and regulatory scrutiny of an industry already under fire during deregulation.
The obvious fix was to stop overbooking, or to bump strictly by check-in order. But that just shifted the cost: airlines would fly with guaranteed empty seats to cover no-shows, and passengers would still be bumped arbitrarily rather than by how much the inconvenience actually cost them — some travelers barely minded a later flight, others had connections or weddings to make, and first-come-first-served couldn't tell the difference.
the move
Economist Julian Simon proposed in a 1968 note in the Journal of Transport Economics and Policy that when a flight is oversold, an agent should pass out bid forms asking each passenger the lowest cash payment they'd accept to take a later flight, then buy out the cheapest bidders instead of forcibly bumping whoever happened to be last in line. The Civil Aeronautics Board's 1978 rulemaking built this into federal regulation, requiring airlines to solicit volunteers before involuntarily denying anyone boarding.
the payoff
The 1978 CAB rule requiring airlines to request volunteers before bumping, paired with higher compensation caps, is credited with driving down involuntary denied-boarding rates over the following decades; by the 2010s the rate has generally run under 1 per 10,000 passengers, though the exact trajectory in the years immediately after 1978 is not precisely documented in the sources reviewed here.
what came after
Simon's scheme, initially mocked as impractical, became a standard textbook case in economics for how market-design thinking — letting people reveal their own price for inconvenience — can outperform administrative rationing, and the volunteer-auction system it inspired remains the backbone of US airline bumping policy today.
filed under
references
- [1]Julian Simon's 'Almost Practical Solution' to Airline OverbookingConversable Economist (Timothy Taylor), 2017conversableeconomist.com
- [2]Airline Passenger Denied Boarding: Rules and RegulationsCongressional Research Service / EveryCRSReport, 2015everycrsreport.com