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 some flights had a considerably larger fraction of 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:

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.