Overbooking Arbitrage
This is a story told to me by Richard P. Gruen.
He learned that American Airlines oversold tickets on seats in anticipation of some random quantity of no-shows.
This was well known but Richard also noticed that certain flights had a considerably fewer no-shows than others.
AA oversold these flights at the same rate as the typically high no-show flights.
Several flights with a high rate of passengers showing up took off from an airport near Richard’s residence.
He would buy a ticket on such a flight and show up for boarding.
Frequently the flight was oversold and he would volunteer to ‘stay behind’.
There was in effect at the time a mandated auction among the passengers with reservations as who would stay behind.
For what it is worth airlines did not charge no-shows.
It just now occurred to me that while this sounds like fraud, it was in fact a win-win-win situation:
- Richard collected the awards for giving up his seat.
- AA payed slightly less in the way of awards since there were more bidders.
- Passengers really needing to fly were less often bumped.
AA’s reputation was marginally improved as a consequence of fewer real bumps.
This did not last long.
AA noticed Richard.
They used the stats that they already had to overbook different flights differently.
End of game.