Why do airlines sell too many tickets? - Nina Klietsch

Summary

Overbooking is a common practice where businesses sell more reservations than available capacity to maximize profits. Airlines, for instance, use historical data to predict no-shows and sell extra tickets, balancing the risk of overselling with the potential for increased revenue. Despite the financial benefits, overbooking raises ethical concerns as it may lead to customer dissatisfaction and compensation costs. The decision to overbook involves complex calculations and models to optimize expected revenue, highlighting the trade-off between profitability and customer service.

Takeaways

• 📈 Overbooking is a common practice where businesses sell more reservations than their actual capacity to optimize resources and increase profits.
• ⏱️ Airlines are a prime example of overbooking, with approximately 50,000 people getting bumped off flights annually.
• 📊 Airlines use statistical data and binomial distribution to predict no-shows and determine how many tickets to sell beyond capacity.
• 💺 The probability of each customer showing up for a flight is a critical factor in overbooking calculations, often assumed to be 90% for simplification.
• 💸 The revenue model considers both the income from ticket sales and the costs associated with bumping passengers, which can include penalties and compensations.
• 🔢 A simplified calculation shows that selling extra tickets can significantly increase revenue, but it also carries the risk of decreased earnings if too many passengers show up.
• 🤔 The expected revenue is calculated by multiplying the probabilities of different scenarios by their respective revenues and summing them up.
• 🧮 Airlines perform complex calculations, taking into account various factors, to determine the optimal number of tickets to overbook for maximum profit.
• 💭 There is an ethical debate surrounding overbooking, as it involves selling the same resource to more people than available, raising questions about the threshold of acceptability.
• 🌟 Overbooking can have a substantial impact on an airline's annual revenue, emphasizing the importance of accurate predictive models in the industry.

Q & A

What is overbooking?

Overbooking is a practice where businesses and institutions sell or book more than their full capacity, anticipating that not all customers will show up.

Why do airlines overbook flights?

Airlines overbook flights to increase profits and optimize resources, as they know not all customers will show up, and this helps to maximize seat occupancy.

How many people are estimated to be bumped off flights annually due to overbooking?

It is estimated that about 50,000 people get bumped off their flights each year due to overbooking.

What is the probability of each individual customer showing up for a flight according to the script?

The script mentions that the probability of each individual customer showing up for a flight is 90 percent.

How does the binomial distribution relate to overbooking?

The binomial distribution is used to calculate the probability of different numbers of passengers showing up for a flight, which helps airlines determine how many extra tickets to sell.

What is the cost structure for an airline when considering overbooking?

The cost structure includes revenue from ticket sales and costs associated with bumping passengers, which can include penalties, free flights, hotel stays, and customer dissatisfaction.

How does the airline calculate the expected revenue from overbooking?

The airline calculates the expected revenue by multiplying the probabilities of different boarding scenarios by their respective revenues and summing these products, then subtracting from the total revenue of all tickets sold.

What is the best-case revenue scenario for the airline in the script's example?

In the script's example, the best-case scenario is selling 195 tickets, which could yield a revenue of $48,750.

What is the worst-case revenue scenario for the airline in the script's example?

The worst-case scenario in the script's example is when all passengers show up and 15 passengers get bumped, resulting in a revenue of $36,750.

What is the optimal number of tickets to sell to maximize revenue in the script's example?

In the script's example, selling 198 tickets is likely to yield the highest revenue, which is calculated to be $48,774.

What ethical concerns are raised about overbooking?

Overbooking raises ethical concerns because it involves charging two people for the same resource, and questions arise about the certainty level at which it is acceptable to sell a seat that may not be available.