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When should you overbook?

Overbook if you can when demand is strong and no-shows are likely.

The complexity of the overbooking process lies in the calculation of all the elements of the table for each seat, and then on the calculation of the optimal number of seats to overbook.

The overbooking rate should be such that overbooking always leads to greater revenues than no overbooking. That rule should be true for each overbooked seat.

To sum-up, the overbooking rate depends on many factors but three main conditions must be satisfied:

  • the demand has to be high enough so that you can sell additional seats
  • the compensation has to be reasonably low and easy to manage (and the company has to provide another seat in a ‘reasonable’ period of time)
  • there must be some no-shows even in a period of high demand.

In practice

In practice, for airlines the number of incidents of denied boarding is very low, less than 1 or 2 per 10,000 passengers for most airlines. This is because airlines try to avoid reaching the stage where they have to deny access to some passengers, as they have to provide compensation, and therefore tend to be quite conservative in their overbooking rates.

Not all the industries can do overbooking though

There are, unfortunately, many sectors of the industry where overbooking is not a good idea, either because no-shows are highly unpredictable or because the cost of denying the access to the seat, room, entry or any other booked-in-advance facility is too costly. Think of a family travelling with children and arriving late at a hotel. They would not accept being overbooked in favour of someone who has arrived before them and then being asked to ‘walk’ to another hotel in the neighbourhood, even with compensation.

Contact over-booked people in advance

To avoid such situations, hotels and campsites ask their customers to confirm late arrivals and put constraints on time arrivals. Recently, some companies have tried to avoid these situations by contacting over-booked people in advance and asking them to bid on the value they would accept as compensation for voluntarily releasing their seats.

This volunteering process may be applicable in many sectors. People would have full information on their own situation and decide the cost of compensating them for accepting a change of flights. Bidding a high price would guarantee a seat to people with a high value for their time, while a low bid would be financially worthwhile for price sensitive travellers.

Join the discussion

Have you ever experienced a denied boarding or any overbooking situation? Share your experience and express your views on the pros and cons of this situation.

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This article is from the free online course:

An Introduction to Pricing Strategy and Revenue Management

École Nationale de l'Aviation Civile

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