Here at Daniels we have a wide variety of graduate business programs: we offer three different MBA programs, six different specialized Masters programs, and Executive Education courses, seminars, and retreats.
The diversity of our programs facilitates interdisciplinary analysis of real-time business issues, and in this instance we asked Lowell Valencia-Miller, teaching assistant professor of Management, and Karen Xie, assistant professor of Hospitality Management, to weigh in on the recent United Airlines passenger removal incident. The difference in their perspectives – between Management and Hospitality – is fascinating. Here’s what they had to say:
The recent removal by Mr. Dao from a United Express flight from Chicago O’Hare to Louisville, Kentucky is another in a long list of self-inflicted incidents resulting in the lowering of airline service expectations. The majority of U.S. airline flights now have more seats that are tightly spaced and rarely have an empty seat thanks to the improved inventory and revenue management systems being used today. In the case of United Express 3411, it was not the inventory and revenue management systems that let the airline down, it was their policies and procedures involving the movement of flight crew members and how they were to handle involuntary denied boarding of passengers.
So why do airlines oversell flights when the passenger load factors for flights are so high? The reason cited so often is the number of customer no-shows that result in a flight departing with an empty seat. An empty seat to an airline is a lost opportunity to generate revenue for that flight given that, in most cases, if the airlines’ cancellation rules are followed, the ticket value can be applied to future travel minus any penalties and plus any fees and/or difference in air fare.
So why don’t the airlines apply the same rules as a sporting event or concert. If you miss the game, you do not get to use the ticket for another game. You forfeit the value of the ticket and you miss out on the game. It is your choice. During the mid-2000’s, a number of airlines attempted to implement, through their terms and conditions, the idea of forfeiture. Some airlines are still doing this today. If you did not show up or cancel prior to the departure of the flight, you lose the full value of the ticket. This would ensure that the airline would realize the revenue for each seat sold. Seems simple. The catch to this proposition is that event and concert tickets can be given or sold to another person to be used. In the case of airlines, the terms and conditions prohibit the renaming or resale of tickets to another traveler.
So where does this leave us? It leaves us with relying upon the inventory and revenue management systems to forecast the expected loads and no-shows for each flight and to manage sales to maximize every seat being filled with a paying customer. It also leaves us relying upon each airline to manage their crew movements in order to minimize delays and cancellations without requiring another traveler from being dragged off their flight.
People are united in their outrage. I want to first make it clear that United Airline flight from Chicago to Louisville on April 9, 2017, was technically not overbooked, accordingly to the UA CEO. The four airline employees who needed the seats, presented themselves to the gate agent after the flight was boarded and every passenger was seated. These employees were not fare-paying passengers, therefore not “booked.”
A few key questions unanswered by the CEO though include: (1) Why give priority to four UA employees above paying customers that they had to be removed to make room? (2) Why not ask for volunteer customers to give up their seats earlier – at the gate – instead of in the flight once everyone was seated? (3) Why would United stop at offering a $800 voucher despite the fact the law permits $1,350 cash or check to compensate a bumped customer? (4) What computer algorithm did UA use to “randomly select” passengers to bump after no one volunteered? (5) Why would police violence be used to forcibly drag the involuntary passenger off the flight?
A full investigation needs to be conducted to address these issues. UA obviously did not handle the incident following the right procedures, finally turning it into a PR nightmare, a stock loss and shrink of market value, and probably a lawsuit too.
Despite the fact that the UA incident is not technically related to overbooking, but rather a severe service failure and customer mistreatment, overbooking is a common practice in the travel industry and is not illegal. This practice allows airlines, hotels, cruises, and other travel businesses to minimize profit loss. The product in the travel industry is perishable and cannot be stocked, meaning if a seat on a flight or a room in a hotel is not sold and taken, the revenue is lost. Overbooking protects airlines primarily when some customers do not show up at the gat or cancel the flight near its departure date while the seats are not picked up by other customers.
The practice of overbooking is usually backed by sophisticated algorithms to precisely forecast the likelihood of no-shows or last-minute cancellations. But as we know computers can be wrong sometimes. What happens if paying customers all show up at the gate of a flight or the front desk of a hotel? Then appropriately bumping or walking customers from the overbooked flight or hotel without losing engendering discontent starts to play a critical role, which demands a customer service skill that I consider even more sophisticated than a computer algorithm.
Bumped or walked customers should be taken good care of. They should be treated well. According to the Department of Transportation, airlines have to announce the call for volunteers to give up their seat at the gate before boarding. Depending on the length of the delay, the airlines may have to offer compensation up to $1,350 for the inconvenience, according to the DOT regulations. If still no one volunteers, the airlines can raise up the level of compensation (for example, Delta used to pay a family $11,000 not to fly).
I believe offering decent compensation is the only right way to bump a customer. I am sort of against bumping customers in a “discriminative” way based on the price they paid, the time they booked, whether they are a frequent flyer guest, and certainly based on the race and ethnicity of the customer. Unfortunately, each airline has its own general guidelines as to who they kick off and why. There are many gray areas in the FAA regulations regarding what exact procedures airlines should follow when bumping customers, which has created many myths and complexities in airline overbooking. And the recent United incident is just the tip of the iceberg.
In the case of an overbooked hotel, guests are less likely to run into a situation of being bumped because they will not even get to the point of being checked in. If a room is occupied, the hotel staff at the front desk is not likely to issue another room card to the overbooked guest. Usually a guest in an overbooking situation will be walked to a nearby property at a comparable price point and quality level. The overbooked hotel will pay the receiving hotel, plus the transportation costs of sending the guest there.
Even if the hotel is doing so, the intangible costs of bumping a guest is difficult to identify and estimate. In the digital age today, bad experience can go viral – a negative customer review on TripAdvisor or a complaining message about the hotel on their Facebook fan page. In addition, the customer him/herself may not be happy and will not return to the hotel anymore. This is exactly why most upper upscale and luxury hotels never or less often do overbooking, knowing that the importance of customer retention, especially those elite customers. The Famous $2,000 Rule by Ritz-Carlton, a luxury hotel brand, explicitly empowering any of its employees to spend up to $2,000 to solve customer problems (including walking a guest) without asking for a manager.