The revelations last week that airlines overbook as a policy and that they can forcibly remove passengers when their calculations go awry has shocked millions from Chicago to China. But it's a problem as old as the industry.
As they expanded service in the late 1940s, airlines struggled with the problem of no-shows. This was a serious problem: A half-empty plane--even one with a few empty seats--could operate at a loss, or with severely diminished profits.
Overbooking was the solution, albeit one likely discovered by accident. Prior to the 1950s airline reservations were a low-tech affair. Each airline had a "master board" at headquarters that showed all the available seats on any given flight. The clerk overseeing the master board would put a green flag next to flights that had only a few seats left, and a red flag when filled entirely. This cumbersome system, though, did not operate in real time, so it was easy to over-sell a flight by mistake.
The airlines, however, quickly realized that this wasn't a problem: Virtually every flight had its share of no-shows. It didn't take long for executives to realize that overbooking was a fantastic money-making strategy.
By 1950 the practice had become widespread. So too did the complaints of irate passengers.
Congress, stirred by irate constituents, began pushing for action. In July 1956 the Civilian Aeronautics Board sent out a letter warning the major carriers to curtail the practice.
The airlines fought back, claiming that any overbooking that happened was an honest mistake, not a result of policy. This, to put it politely, was highly unlikely.
Enter economist Julian Simon. In a short but cheeky article published in a very obscure academic journal in 1977, Simon proposed a novel solution: Airlines should conduct an auction, with passengers offering sealed bids as to what they would be willing to accept for the inconvenience of getting bumped. The lowest bidder (or bidders) would get bumped and receive a voucher; everyone else would fly on schedule. "All parties benefit, and no party loses," wrote Simon.
Simon didn't expect the article to be taken seriously. It was written in a lighthearted tone.
But Simon was on to something. In subsequent years, airlines gradually adopted a crude version of the auction, offering vouchers at a certain price, and if this failed to attract passengers, raising the price.
Unfortunately the auction system was grafted onto older regulations governing how much money passengers could be paid. Today that figure is a maximum of $1,350.
If regulators want to solve this problem for good, they should consider the vexed history of overbooking and abolish this upper limit, then implement Simon's proposal in its entirely. That means airlines should be permitted to overbook flights but when they need to bump passengers, they should remove only people who have voluntarily given up their seats for a voucher, with the price set by auction.
Perhaps that price will be $500; it may well be $5,000. But one imagines that after handing out some vouchers in the high four figures, the airlines may, after 70 years, finally curtail their reliance on overbooking.
Editorial on 04/17/2017