Why Overbooked Fliers Are Like the Google IPO

We are flying again and the airlines are overbooking again.

During the fourth quarter of 2020 4,979 passengers gave up their tickets on overbooked flights. Now the number, at 72,972, is close to normal.

Overbooking Solutions

No-shows are a no-win dilemma. If airlines ignore the problem, they have empty seats and less revenue. But if they overbook, they anger passengers.

An auction was the solution.

Explained by an economics professor in 1968, the airlines just needed to ask their passengers. Offered vouchers and cash, passengers could decide what a ticket was worth.The airline would be pleased because their planes were full. Meanwhile, bumped customers felt good because they, not an airline, made the decision.

Seeing the idea’s brilliance, American Airlines was the first to use it. Still today, at the gate, an attendant might ask us if we are feeling flexible.

Our Bottom Line: Dutch Auctions

When an item is sold through a Dutch auction, each of the bidders submits a price and a quantity. In that way, the people in charge know how much and how many. Next. moving up or down, the highest price that clears the market is identified.  Whereas price starts low in a traditional auction as bidders compete for the item, in a Dutch auction, it can start high and you move down to see where all can be sold.

One of the most famous Dutch auctions was the 2004 Google IPO (Initial Public Offering). When Google first sold shares of its company to you and me, it sidestepped tradition and decided not, at first, to give the shares one price. Instead, it asked everyone to name their share price. Descending from the highest bid, they determined the price that let them sell all of their shares. Then, based on that information, they had their price.

Overbooked flights use Dutch auctions to lure fliers off the plane. When an attendant calls out ascending offers that ticket holders can voluntarily accept, we have a reverse Dutch auction. It is also possible to have a reverse sealed bid auction when we submit bids privately.

My sources and more: Seeing this WSJ article, I realized we should return to overbooking. From there, Eric Schmidt (Google’s former CEO) completed the picture in HBR.