Acton Institute Powerblog

United Airlines and the economist who solved the overbooking problem

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This weekend a video went viral that shows a passenger on a United Airlines flight from Chicago to Louisville being forcibly removed from the plane before takeoff at O’Hare International Airport. According to an eyewitness of the incident:

Passengers were told at the gate that the flight was overbooked and United, offering $400 and a hotel stay, was looking for one volunteer to take another flight to Louisville at 3 p.m. Monday. Passengers were allowed to board the flight, Bridges said, and once the flight was filled those on the plane were told that four people needed to give up their seats to stand-by United employees that needed to be in Louisville on Monday for a flight. Passengers were told that the flight would not take off until the United crew had seats, Bridges said, and the offer was increased to $800, but no one volunteered.

Then, she said, a manager came aboard the plane and said a computer would select four people to be taken off the flight. One couple was selected first and left the airplane, she said, before the man in the video was confronted.

As many people on social media have pointed out, the solution to the problem seems clear: United should have offered more money until someone accepted. But that solution, while obvious to us today, wasn’t so obvious in the past. In fact, randomly removing passengers was airline policy until economist Julian Simon came up with a solution.

In a 2014 article for Fortune, Chris Matthews explains how Simon helped transform airline travel:

Simon helped revolutionize the airline industry by popularizing the idea that carriers should stop randomly removing passengers from overbooked flights and instead auction off the right to be bumped by offering vouchers that go up in value until all the necessary seats have been reassigned. Simon came up with the idea for these auctions in the 1960s, but he wasn’t able to get regulators interested in allowing it until the 1970s. Up until that time, Litan writes, “airlines deliberately did not fill their planes and thus flew with less capacity than they do now, a circumstance that made customers more comfortable, but reduced profits for airlines.” And this, of course, meant they had to charge passengers more to compensate.

Economist James Heins says the shift to passenger compensation led to a savings in the U.S. economy of about $100 billion over the last three decades. This has allowed airlines to operate at a higher capacity and makes flights more profitable while reducing air fares and increasing tax revenues.

“People know about the system, but they don’t know where it came from,” said Heins, who worked with Simon at the University of Illinois. “I think they should. There are a lot of important research breakthroughs on campuses, but few generate $100 billion in savings to the American economy.”

Simon understood a basic fact of economics—one that United Airlines seems to have temporarily forgotten: People respond to incentives. If United had simply provided a proper economic incentive (i.e., increased compensation for the hassle of missing a flight), they could have saved the company millions in lawsuits and bad press. Instead, they are learning what happens when a corporation treats interactions with customers as a zero-sum game rather than as an opportunity to use incentives to make everyone involved better off.

(If Simon’s name sounds familiar, it’s probably because you’ve heard of his famous bet with would-be doomsday prophet Paul Ehrlich.)

Link via: Tyler Cowen

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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