Airline Overbooking Is Flying High

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s probably one of the least likeable things about airlines. The idea of overbooking allows airlines to sell more seats than there are on the plane in the hope that not everyone shows up and the airline can make money on the tickets for which passengers never showed. But it doesn’t always work out so great for passengers, especially those who are bumped. While only a fraction of a percent of passengers are actually bumped from their flight, the practice of airline overbooking and the subsequent passenger bumping it can lead to has ruffled feathers among consumer advocates and regulators alike.

Not much compensation

A long standing policy used by Air Canada (TSX: AC.A) (TSX: AC.B) was to give bumped passengers a choice of either $100 cash or a $200 travel voucher. For most passengers, this is little compensation for what often amounts to a major inconvenience in their travel plans. Fortunately for bumped passengers, consumer advocates convinced the Canadian Transportation Agency to force Air Canada to revise its bumping policy. The Ottawa Citizen now reports that the new policy calls for passengers to receive between $100 and $800 cash, depending on the length of their delay. The policy also allows for higher compensation amounts given in travel vouchers.

Despite a dislike of Air Canada by many passengers, a characteristic of many airlines and the industry in general, Air Canada did succeed in being crowned the Best International North American Airline by Skytrax for the fourth year in a row. Even with the occasional bumped passengers or flyers who had their luggage lost, Air Canada appears to be doing a satisfactory job in customer service as a whole. This should be beneficial to Air Canada as it tries to maintain its market share in competition with an expanding WestJet and add capacity to its international network.

Buy some tablets

Businessweek reported a rather interesting sort of airline fine a couple weeks ago. After violating passenger bumping rules, Delta Air Lines (NYSE: DAL) was assessed with a fine of $750,000, but there’s a catch to the terms of the fine: Delta can use $425,000 of the fine to purchase tablet computers to find volunteers to be bumped when an overbooking occurs. Exactly what difference nearly half a million dollars of tablets will make depends on how Delta implements the proposed program. As a Delta shareholder myself, I congratulate the airline’s negotiators on keeping more than half the fine to reinvest in its own business, however the incident does raise questions as to how future passengers’ rights violations will be handled by federal regulators.

Other airlines too

Airline overbooking, and subsequent bumping of passengers, is a common industry practice regulatory agencies have come to accept. Even the airline that tries to build itself on a customer service image, Southwest Airlines (NYSE: LUV), has been guilty of passenger bumping and was fined $200,000 for bumping violations in 2010 according to CBS News. While it has avoided most baggage fees in an effort to appear more consumer-friendly, even Southwest sees the benefits from overbooking aircraft and the additional revenue obtained from selling more seats than it flies. Southwest has made some sacrifices in ancillary revenues on the baggage side but it refuses to give up all aspects of the airline industry. Despite this continued overbooking, Southwest could maintain its consumer-friendly image simply by not implementing baggage fees which attract ire from a large base of passengers.

Compensation

Since overbooking is a common practice in the airline industry, regulators have adopted policies to ensure passengers received at least some degree of compensation for being involuntarily bumped from a flight. In fact, the Department of Transportation has policies covering lost bags (carriers are required to refund fees on lost bags) and tarmac delays as well. Travelers are encouraged to stay updated on their rights as passengers and can view current policies by visiting the Department of Transportation website. But at the end of the day, airlines will continue overbooking flights and bumping passengers because it’s profitable for them. And as shareholders, we tend to like profits, but as passengers, we should know our rights.

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Alexander MacLennan owns shares of Air Canada and Delta Air Lines. He is also owns the following options: long $22 Jan 15 calls, long $25 Jan 15 calls, long $30 Jan 15 calls, long $17 US Airways calls. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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