We have all been there, sitting at an airport gate when the staff cheerfully announces that the flight is oversold and that they are looking for volunteers to takie an alternative flight. The gate agent then announces a series of increasing offers until enough passengers have been bought out. As the graph at right shows, although overbooking and thus bumping is not as prevalent as it was in the late 90’s, it has been an increasing issue as airlines recover from the recession. In addition to the sour economy, regulatory issues are coming into play. The Feds are raising the required compensation for involuntarily dumping a passenger to as much as $1,300.
So what would it take to get you to give up your airline seat? According to the Wall Street Journal, Delta is now explicitly asking passengers that question (Delta Makes Fliers Bid to Get Bumped, Jan 14).
Delta’s new system, which has been up and running since last month, replaces that often-chaotic system with a silent auction that asks passengers to name their price electronically before they arrive at the departure gate if it looks as though there may not be enough seats on a flight.
Passengers who check in with Delta online before leaving for the airport or at kiosks before going through security can type in the dollar amount they would accept from the airline to be bumped from their flight. Delta can then accept the lowest bids, eliminating a lot of the uncertainty early.
Delta sees a lot of good coming from this.
Atlanta-based Delta says the new bidding system allowing passengers to be voluntarily bumped is a “win-win” for consumers as well as the airline because it boosts efficiency and removes a lot of the chaos at the gate. Delta wouldn’t say how many fliers have used the new system.
“Saving three or four minutes at the gate has a big operational impact,” said Paul Skrbec, a Delta spokesman. He acknowledged that the price Delta has to pay fliers to agree to be bumped” probably would be cheaper” under the silent auction.
So I grant that anything that simplifies the boarding process is likely to be socially efficient. However, I think that this fundamentally anti-consumer because it increases the informational advantage the airline has. Under the traditional system of gate agents announcing ever-increasing offers, the agent knows how many passengers need to be bought out. I might be willing to take the current offer but may hold out for something better. That, however, is risky since I don’t know whether there will be a better offer since I don’t know how many volunteers are needed. Under Delta’s scheme, the agent still has the advantage on quantity but also knows the distribution of reservation valuations. He or she knows whom to call to the podium and in what order. Delta’s costs are lowered and consumers receive less compensation.
I am sure that I can find an economist who will assert that its OK that consumers get squeezed because the overall outcome is efficient. Those with the lowest cost of being bumped are properly identified and are offered a deal they have said they will accept. I am not sold on the overall efficiency, however, because consumers don’t know what they are actually bidding on. There are actually two parts to being bumped — what the airline pays you and when they get you get to your destination. If the alternative travel offer is routing through a different hub and only being 45 minutes late, I can be bought off cheaply. If the next available flight is 30 hours away, I would need a huge offer. I don’t know that I could actually give an estimate of my reservation price to be bumped unless I know the complete offer. Again, the airlines have the informational advantage here. They have a much better estimate of which passengers can be easily accommodated. Social efficiency would require balancing those with a low cost of waiting with the delay they must endure.