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

Business for the Common Good: A Christian Vision for the Marketplace

Business for the Common Good: A Christian Vision for the Marketplace

Scott B. Rae and Kenman L. Wong seek to explore critical business issues from a uniquely Christian perspective, offering up a vision for work and service that is theologically grounded and practically oriented.

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).

Comments

  • CD Ard

    This report isn’t even close to accurate. The flight was not overbooked, and the CEO has admitted it. The plane was fully boarded and ready to taxi when 4 employees of United showed up unannounced with no reservations, or tickets. It is a violation to force passengers off of their confirmed seats after boarding, with bribes or police. The 4 employees interfered with normal flight operations and delayed the departure. The gate agent will lose their job for numerous violations, including racial discrimination. There was no random selection used. United will be fined by the FAA for regulatory violations, and the city will probably do the same for misuse of the airport facility and personnel. United’s operational license was violated as well. No one forfeits their civil rights or their consumer protection simply because they walked through a gateway onto an aircraft. But then unionized thugs don’t get that part…..they are too important…too special, too powerful. They think.
    Union bargaining will take a big well deserved hit on this one, as well as the corporation that allows unions to run the operation. A gate agent ordering officers to physically assault a passenger is pure hardcore police state thuggery.

    • David

      I believe the employees had to be on that flight to get to another airport and work another flight because that plane didn’t have enough of a crew to do so. It’s better to inconvenience 1-4 persons than the hundreds on the flight these employees would be working. If United picks passengers to be involuntarily bumped the same way as the airline my wife works on then they choose the last person(s) that checked in last to be bumped unless it’s a child or handicapped person. I doubt it had anything to do with race.

      • Michael Graf

        Its not about overbooking,,,this is about passenger assault ,,, the idea that once you already have a seat and then get turfed because the airline doesnt have the sense to acommodate the needs of someone that already has their place is insane,,, airlines deal with overbooking before boarding,,, which brings us to Uniteds response,,, to forcible remove and beat a customer is an indication of how far the sense of POWER ENNTITLEMENT has now reached,,, it now affects the civil behaviour of people that are supposed to serve and protect us while on an aviation journey already fraught with indignities and social abuse,,, what this incident illuminates is the culture of those in power now expect unwaivering submission to any of their request no matter how unjust with the failure to do so will be physical assault,,, in the olden days this was reserved for the Fascist realm,,,this is not about United,,this is about how far America has now succumbed to the POWER OF Authority and not Justice

  • Keith Keeler

    Instead of offering $1500 for someone to get off that plane, I suspect United will be paying somewhere in the neighborhood of $3 to $5 million to the man they beat the crap out of and dragged from the plane. Hmmm…it is simple economics except when it bumps in the face of corporate greed. I have a suggestion for a United’s new motto…”Do as we say, and nobody gets hurt.”

    • David

      United didn’t drag him off, the police did. United did what every airline does. This passenger had the chance to get off peacefully and he chose not to. Until my wife started working for an airline, not United, we probably would have thought the way most other people who just does not know how the system works. Can’t speak for United, but the airline my wife works at first asks for volunteers with compensation. If not everyone shows up and these volunteers are not needed which happens more often than not, then there is no longer a need for volunteers. If no one volunteers, then the airlines have to wait until the 15 minutes before the plane is due to leave to allow everyone to check in. By this time everyone who is there has boarded. So, if overbooked at this point and no one still volunteers then the airline has to start asking those who checked in last that they are being involuntarily bumped. If it’s a child or handicapped person who checked in last, they are not bumped. So, it’s the last qualified person who checked in last that has to get off. As far as compensation, my wife’s airline gives 4 times what the passenger paid for his ticket up to $3,000 or $3,500 cap. So, if he paid $100 for his ticket, he would have gotten $400. If he paid $1,000, he would have gotten the max. As far as allowing the airline employees to fly instead of passengers, the airline industry, and rightfully so, believes it’s better to inconvenience 1 passenger versus 100’s. They were on their way to work because the crew on the plane these employees were going to had probably timed out or were sick or whatever. It’s an unfortunate situation that did not need to happen.

      • Delakando

        “The police did” actually it was the police under United’s control. Stop trying to turn this to antipolice when they are following united’s policies.

        • David

          Not blaming police. Blaming Dao.

  • Jayman

    i have never flown UNITED and NEVER EVER WILL FLY UNITED!