How Not to Deal With Airline Overbooking: Why Equal isn’t Always Fair and Choice Mechanisms Work Better Than Command and Control

by Steve Montague

My wife and I recently celebrated our 30th wedding anniversary with a trip to Europe. Everything went well until the last day when we went to Schiphol Airport to check in at KLM – Air France. We were shown as ‘standbys’ on our tickets. This was news to us. We had booked the trip four months in advance with KLM directly. At that time we understood that seats came with the booking. Apparently we were wrong.

Most of us who travel frequently know that airlines overbook flights with the anticipation that in most cases they will be able to easily reduce or eliminate the overage because a proportion of passengers will not show up. In this case KLM miscalculated by two people. Guess who those two people were? (Let me set aside the fact that to us, we had booked directly, booked early – and then gotten ourselves to first in line for standby when we were informed of the problem. This was all for naught as KLM chose to keep large travel groups together by assigning all available standby seats to people in bigger groups. More on this below.)

You see we were told that we had been randomly selected to be bumped to ‘stand by’ due to the overbooking. Random selection means an equal chance of selection across all members of a given cohort – in this case, passengers who had booked seats on this flight. That sounds fair enough – assuming airlines are insistent on overbooking to ensure a full load on each trip. (That is a policy that clearly places productivity over quality in terms of values – but that is for another discussion.)

The problem is what happened after the random selection. As noted, despite getting ourselves quickly registered as first standbys, the lead agent decided that anyone in groups should not be separated – therefore she bypassed us and assigned seats to those who were apparently associated ‘with groups’ ahead of us. So despite our likely having paid the highest ticket price, booked early and gotten ourselves to the head of the standby queue earliest in terms of registering with an agent, the allocation of the standby seats shifted from random to ‘purposive’ – as we would say in sampling language – using an apparent decision rule of “don’t separate groups”. In the application of this decision rule I suppose it at least united us in our misery.

Our loss was eventually (after much ‘discussion’ I will skip for my purposes here) compensated by a re-booking at KLM expense on a flight home via KLM and then another carrier in a different city 6 hours later. We also got food vouchers and a significant sum of Euros for our trouble. (In full disclosure, we did get a choice in this compensation – either a certain sum of Euros or a certain greater sum – about 25% higher ‘value’ – in future travel vouchers with KLM. We chose the cash.)

Aside from my skepticism that the allocation of standbys was in fact random in this case (for example, it seems highly improbable that all random standby assignments would be allocated to just 3 groups of people out of a total number of about 400 seats on the plane. There were two among a group of student travelers, four from a group of senior travelers and of course my wife and myself as the ‘third group’. There was also notably no allocation of random standbys to first class, business class or economy ‘plus’ class seats.)

So what is wrong with this picture? Here are the two fundamental principles or truisms that KLM got wrong with regard to service or more broadly, decision implementation.

Equality vs. fairness

Allocating from a random assignment where supposedly each passenger would have an equal chance of getting bumped may sound ‘fair’ out of context, but it runs completely contrary to the implied economic and social model and contract of modern travel. Seats are differentiated by price. The higher one pays – the higher is one’s expectation of seat security. Since none of our eight random selections came from any of the higher cost seats one suspects that the selection was in fact a stratified random sample. In other words it was randomized within a basic lower priced seating choice. So I suspect that KLM did not tell us the truth in saying that the selection was random. If that is the case – then why not stratify by the actual fares paid and on top of that then inform those paying the lowest fares that at these prices the purchasers may be subject to a standby bump? That would be fair.

Command and control vs. choice

More importantly, the full control over who was to get the seats they paid for and who was to get bumped was made by KLM according to their own criteria as to who was worthy of seats and who was not. This centrally controlled method of ‘non’ seat allocation or ‘seat rationing’ caused unnecessary grief – not just for my wife and I, feeling unfairly selected ‘out’ but also for other passengers – as the final stand by ‘count down’ was made and a great deal of anxiety was clearly expressed by many people and their co-passengers. I’m sure this was also felt by KLM staff as well as others prior to the final rulings being made by the ‘queen bee’ of seat election – KLM’s lead agent at the gate.

How could this have been done with less burden (time and effort), less confusion, less anxiety, more fairness and almost certainly less cost to KLM? Simple – they could have offered people money to take a later flight. I have observed this tactic used several times in North America, and my guess is that the amount of the offer could have been as little as half (or even less) the amount that KLM actually ended up paying us in compensation. This is because the marginal cost of a delayed flight varies quite a bit among passengers and that out of an approximate number of 400 people it is likely that the amount that two people (the 0.5 % of the whole cohort most easily bribed to delay their flight plans) would have taken to be bumped would have been a fraction of what my wife and I thought was fair compensation. Of course the real bonus is that this would have been a decision made collectively – not selectively – and therefore would have been satisfying, to the extent possible, the free choice of those concerned.

So what is the moral of our story? Service providers and policymakers at many levels should recognize that equal is not always fair and that allowing a diverse set of people to make less coerced choices almost always produces a better solution than relying on a command and control function from a centralized source of decision making. This has been articulated many times by mainly North American authors such as James Surowiecki in The Wisdom Of Crowds and by the authors of Nudge – Thaler and Sunstein.

So now to my cautiously grand over-generalization of this anecdote… (so take it for what it is worth…) There is much I love about Europe. It’s social conversations appear to be more frequent, more thoughtful, fairness oriented and wide ranging than many of our North American ones in terms of policies, programs and services. But if this small incident is in any way indicative of the European approach to service or policy implementation – or by implication – economic policy execution – as compared to that of North America, then as a North American investor I will likely keep my money (and perhaps even my airline travel choices) close to home at present. One needs to recognize market transactions as market transactions. Central ‘regulation’ needs to be there for fundamental safety, security, health and some complex economic circumstances – but when it comes to uncomplicated price-consumption choices – it’s best to let people collectively decide through a market mechanism.