#371 1978 · US airlines · Aviation
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.
what everyone would do
Stop overbooking entirely, or bump strictly by a fixed rule like check-in order. Neither actually solves the problem: eliminating overbooking wastes revenue on seats that fly empty every time a passenger no-shows, and a fixed rule still forces the same loss onto whoever is unlucky, with no way to tell a traveler who barely minds a later flight from one about to miss a wedding.
what they saw
Simon saw that the real scarce thing wasn't the seat, it was information the airline didn't have: which passenger actually valued that specific flight least. Rather than guessing or applying an arbitrary rule, he proposed asking passengers to reveal their own price for giving up the seat — letting a market, not an administrator, decide who bears the cost of the shortfall.
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.
why it works
Overbooking based on average no-show rates fills seats that would otherwise fly empty, so the goal isn't to eliminate it but to minimize the cost when it doesn't clear on its own — and that cost is lowest when the seat comes from whoever values it least, information only that passenger holds. Soliciting bids lets each person reveal their true switching cost without the airline needing to guess, and buying out the cheapest bidder turns a forced, resented loss into a voluntary, welcome trade: the airline pays less than the seat is worth to it, and the volunteer receives more than their actual cost of delay, so both sides are better off than under any fixed rule.
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.
where it breaks
The mechanism needs enough time before departure to actually run the auction — an oversell discovered at the gate with boarding already underway leaves no room to solicit and evaluate bids, forcing a fallback to involuntary bumping regardless. It also depends on at least some passengers genuinely having a low cost of delay; a flight fully booked with travelers making tight, high-stakes connections has no cheap volunteer to find, and the auction can fail to clear at any price the airline is willing to pay. And it requires passengers to bid something close to their real cost rather than holding out strategically for a higher price, which the system only handles by raising the offer until someone accepts — at real expense to the airline.
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.
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