Is it time for the legacy carriers to take a RADICALLY different approach to inventory management?

While I have no experience working in inventory/revenue management, I feel compelled to make this post since it’s something that has always mystified me. It never ceases to amaze me how bad the US legacy carriers are at taking money from people, outside of nickel-and-diming. Some airlines have impractical websites that make it tough to pay a premium for a higher fare ticket (just look how most airline websites hide the “first class” button when trying to make a reservation), while others have long lines at airport ticketing, which is where a lot of their money comes in.

Anyway, the one thing I’ve never understood is why airlines “zero out” flights, or refuse to sell more seats. I propose that airlines always offer “Y” (true full fare, not government discounts, etc.) availability, regardless of how overbooked a flight is. When you’re bringing in the “rack rate” there’s no reason to turn down customers, even if you have to bump dozens of others. Think about it, while the normal passenger is paying $100, a full fare ticket would probably be $1,000. It’s amazing how often we see flights days out that are sold out, when we know not all of their sales have been on high fares. Obviously the job of inventory management is to attract both the leisure traveler with cheap, restrictive fares, while trying to get business travelers to purchase the higher fares. All too often the most valuable customers to an airline — the last minute business travelers that are willing to pay full fare — are out of luck because the airlines aren’t selling seats anymore.

The one practical obstacle here (which also results in a lot of overbooking), at least at United, is that agents can use the “Y” bucket for rebooking people, which means a lot of people booked in “Y” the day of didn’t really pay, but instead got conveniently placed in it due to a cancellation, bump, misconnect, etc.

Filed Under: Misc.
  1. This might induce more VDB/IDB situations, thus resulting in more $140 charges like in your last post. I’m sure they’ve considered.

  2. Fair enough, bmvaughn, but if we’re talking about my recent JFK-SFO flight, the unrestricted coach fare for that route is $2,000+. All of a sudden that $140 hotel doesn’t look that expensive….

  3. And how would the $100 “normal” ticket purchaser — who bought his/her ticket in good faith 3 weeks ago — feel about getting bumped by someone who purchased yesterday, no matter what they paid?

  4. Well Ken, I actually don’t see the number of IDB’s increasing if such a system were implemented for two reasons:

    1) It’s too frequent that flights are zeroed out a week before departure, where a business traveler may very well have to make a reservation. In almost every case, however, inventory opens up closer to departure. This system would result in more overselling, but not necessarily more overbooking come flight time.

    2) The airlines could do lots of things to make VDB’ing more lucrative in these situations, all of which cost them very little, like two free tickets (instead of one), advertising travel credits, upgrades on the rebooked flight, etc.

    I just don’t think UA can afford to lose any full fare ticket they can get….

  5. Even given your proposition that IDBs would not increase, assume for a moment that they would increase. Would this lead to a fare-basis-based IDB strategy, and that IDB would be a risk that a customer takes on by booking a cheap fare class?

  6. I like the idea.
    I’ve also noticed that on 3 class equipment, C9D9Z9 suddenly went to C0D0Z0 overnight.
    UA couldn’t have possibly sold 3 business class fares overnight, but most likely they oversold Y and not to sell C tickets any longer.
    I think this is stupid as well.
    Sell full Y/C and IDB someone if you have to.

  7. @ intrepid720 — But IDB’s can’t increase, because then the DOT would get involved, and no one likes that. Come on now, though, if the compensation is lucrative enough, people *will* VDB. There are lots of things UA could offer as compensation which cost them little but are valuable to flyers, like SWU’s, CR1’s, etc. Full fare tickets are just so damn expensive that I don’t see how any airline could turn revenue like that down…

  8. Lucky, I agree. I can’t count the number of times I’ve suddenly see a zillion seats open up at the last minute. And, you are correct about how to appease the $100-fare, bumped traveler: Upgrade on next flight, two free domestic tix instead of one, etc.

    Very good points.

  9. What UA needs to do is to build a better brand loyalty through performance (what SWA has done despite relatively low full fares), not just a loyalty program. People need to know when they purchase a ticket, they can expect to be transported from point A to B on time. Business travelers who pay full Y for business trips will be leisure travelers too. Imaging how they would feel when they are treated differently each time depending on how much they have paid (remember not every business traveler is a 1K).

  10. Kai,

    I’m not sure that brand loyalty based on being on-time works either though. USAir which is touting the fact that it’s the most on-time of any of the “major” carriers (however it is that USAir defines major), and yet you don’t see people clamoring to fly USAir.

  11. @ Kai — I agree about building loyalty among customers, but that’s not an easy fix. There are so many things standing in the way of United building true loyalty, not the least of which is Glenn Tilton, United’s CEO, who couldn’t give a flying you-know-what about his employees.

    Also, if you’re inferring that my suggestion would cause people to be treated differently based on their fare, then I apologize for not being clear. The point of this is for legacies to generate more revenue, and that’s it. This proposal is a win-win-win, in my opinion, and there are only a few practical things standing a way. It’s a win for United because they get more profitable business, it’s a win for the business travelers because they can get the flights they want, and it’s a win for the leisure travelers because they can get compensated.

    For what it’s worth, if I ran an airline I wouldn’t do IDB’s. While I realize IDB’ing passengers is totally within the rights of the airlines, it’s simply not right. The basic argument I hear from passengers that get IDB’ed is all too true: “But I’m confirmed on this flight, how can I be bumped off.” Unfortunately gate agents have too little discretion, in my opinion. They should be able to up the offer until someone takes it. That’s also how you build loyalty, in my opinion.

  12. While I am not going to get into the details here – there are a lot of factors to consider, many of which are not mentioned above. For general info though, I would recommend MIT’s Airline Data Project where you can find lots of interesting information.

  13. Lucky – if IM zeroes out the flight, it typically means that the flight is already oversold beyond historical no-show, and if they sell even just one more seat they’ll have to bump someone off. The airline can never count on VDB as a method of reducing passenger count – what if no one volunteers?

    Also, IDB is *NOT* a good thing for anyone. It counts against the airline’s stats, and generates negative goodwill for those who were bumped, not to mention the agents who had to rebook them on a later flight, which might be also full already. What do you do then? Endorse the ticket over to another airline, which then they have to pay out, possibly at full Y fare. If they stay overnight, they’ll have to pay hotel ($140 in your case) and meal charges.

    FWIW, UA does offer last Y availability to 1K and GS members:

    1K Priority Reservations
    You have priority status to acquire seats on United flights, even on many sold out flights, on all United and United Express® flights anywhere. However for all priority reservations for you, and one traveling companion, you must call 1K Reservations no later than 6 hours before your flight and no earlier than thirty* days in advance, and purchase an E-TicketSM in United Economy® Y booking class fares**.

  14. Lucky — I agree with you. When I explain IM to people, I usually explain it as, ‘if you could get $2000 from a passenger, but had to pay a different passenger $400 to get them off the flight, would you?’ And everyone instantly agrees.

    I’ve seen so few IDB situations that I agree, it’s not an issue. In the vast majority of cases, there are plenty of people willing to VDB — and if not, just up the compensation.

    In reality, I think that UA does the best job of aggressively managing inventory. Think about it. Why do we like to fly UA (among other reasons)? Because our bump chances are better than any other airline. Why is that? Because they overbook the most. Why do they overbook? To maximize the revenue.

  15. @ Anon — Thanks, and I’m sure there’s plenty I don’t know about this. As I said, I’m just trying to think logically here from the viewpoint of a non-expert on the issue.

    @ ptahcha — Let me use a scenario I used earlier again. All the time I see flights a week out that are sold out, only to progressively have more and more availability as the day of travel approaches due to cancellations. People that might have booked full fare a week out fly different carriers instead. Don’t you think it makes sense to take the small risk instead and offer availability throughout?

    I clearly stated above that IDB’ing is a bad thing. VDB’ing, on the other hand, is a good thing. Let’s be honest, for many a free ticket for an overnight bump isn’t a good deal. But have United throw in a systemwide upgrade, an upgrade on the next flight, or maybe two free tickets, and you’ll have people running up to the gate to VDB. I just don’t see how IDB’s would increase.

    @ hobo13 — I totally agree with you. BTW, while I think UA is about as aggressive as they get when it comes to overbooking, I think you’re forgetting a major aspect of the situation — their incompetence. All too often there are too many people rebooked last minute because the computers aren’t updating fast enough, and after a canceled flight everyone is rebooked and all of a sudden they’re oversold by 100. 😀

  16. I dunno, Lucky. You and I jump at the chance for a VDB. But I think the overwhelming # of people want to get where they’re going … and they don’t care what UA has to offer. Besides, most people know how hard it is to use a free ticket … and the ability to use an upgrade instrument is perplexing at best. I think IDBs would go through the roof.

    And I think you underestimate just how bad an IDB is. These people vow to never fly that airline again. So UA is giving up all future revenue from some customers.

  17. @ Uniter — Fair enough, but I’m going to stick to my original position that I DO know just how bad an IDB is. As I said above, airlines shouldn’t be allowed to IDB, in my opinion. They should keep raising the offer until they have enough volunteers. While I agree with you in general about most people wanting to get to their destination, let me give one more example.

    A couple of weeks ago I was flying JFK-SFO, and the flight was WAY oversold, by at least 15 people (which is a lot for a plane that has just over 100 seats). At first no one took the offer. Then they started offering business class on the next flight. You should have seen how quickly people jumped at the opportunity. The prospect of upgrades is extremely appealing to most, in my opinion, and I think it could work.

    Again though, the fundamental change I’m suggesting shouldn’t increase the level of bookings the day of. I’m referring mostly to the times when a flight is zeroed out a week in advance, only to have plenty of inventory open up closer to the date of flight as people cancel.

    Look at this from a marketing perspective as well. Every airline wants to cater to business travelers, and what better way to do that than to basically say “we saved you a seat” on every flight. Sure you’ll have to pay dearly, but we’ll get you where you need to go.

  18. Really? They jumped at domestic business class. United domestic business class? 😉

    You’re right about that particular policy.. why open up inventory later?

  19. I don’t know, I’m not a fan. Could United get smarter with revenue management? Sure, absolutely. But leaving some categories always open is an invitation to increase IDBs and is basically handing Congress a great excuse to pass a passengers’ bill of rights that could make revenue management worse than before.

    Plus, it could easily dissuade some people from booking United. Yes, these would be lower-fare pax, but they still bring revenue, and any possible word of mouth on IDBs could really hurt UA.

  20. I’m starting to think that my posts are invisible or something. 😀

    Let me try one more time: This will NOT lead to more IDB’s. N-O-T. Everyone seems to mention the issue of IDB’s without explaining how this would cause more of them.

    The primary issue in my mind is that flights are sold out a week in advance, and lots of inventory still opens up last minute from people canceling. Come on guys, I fly 200,000+ miles a year and monitor loads very carefully, so I feel confident saying there’s a trend. In the meantime, business travelers end up booking other airlines because there’s no availability. These are tickets that are ten times as expensive as the average ticket we’re talking about here.

    Come on, people in the US are financially motivated. It’s rare that I see an IDB (and again, I DB at least a dozen times a year), yet United is always “stingy” when I see DB’s of any type. If the gate agents had discretion to up the ante, why on earth wouldn’t passengers take a bump? There are tons of leisure travelers even on business routes, and there’s no way you can tell me people wouldn’t volunteer if the price is right. That’s crazy.

    Anyway, I’ve said all I can say (at least for now), but those that keep touting the IDB myth, please support your argument….

  21. In the latest DOT report, United ranked 9th for IDBs (1.08 per 10,000 pax).

    However, for VDBs, United ranked the highest of the legacies, with 16.09 per 10,000 pax.

    This suggests a few things – first, United’s revenue management could be a bit screwed up. Second, it’s already giving out plenty of vouchers as is. What’s United’s limit when it comes to giving out vouchers? At some point the increased value of vouchers is going to make it not advantageous to do the VDB, and they’re going to have to do some more IDBs.

    Personally, I’m not a fan of overbooking, period. Your ticket should be something that means “you might be able to get somewhere today!” One reason I admire JetBlue as a company.

  22. I’d say a high number of VDB’s and low number of IDB’s is the place to be. Keep in mind that VDB’s are good for both the consumer and the airline. I’ve never seen someone walk away frowning when they took a VDB, so that does build quite a bit of goodwill.

    I agree with you about IDB’s. As I wrote earlier, I don’t think airlines should IDB under any circumstances. At the same time I support the airlines overbooking, as that’s the way to maximize profit. They just have to be ready to pay whatever it costs to get someone bumped when the statistics don’t work in their favor.

    I still don’t see why passengers wouldn’t take VDB’s. Let’s say United sells a last minute full fare ticket on a two hour flight where the lowest published fare is $150 and the full fare price is $1,500. If they offered $1,000 in cash for someone to take a VDB people would probably fight over it as if they were $9 DVD players on Black Friday at Wal-Mart. United would still come out ahead, you’d have one very happy customer, and the business traveler can count on the airline. Win-win-win in my book.

    It all comes down to gate agents not having enough discretion to up the ante.

  23. “I’d say a high number of IDB’s and low number of VDB’s is the place to be.


    I agree with you about IDB’s. As I wrote earlier, I don’t think airlines should IDB under any circumstances. ”

    Huh? I think you just contradicted yourself.

  24. Oops, sorry about that, I mistyped. I meant to say a high number of VDB’s and low number of IDB’s.

  25. “I still don’t see why passengers wouldn’t take VDB’s.”

    All depends on the trip. Example – if I’m flying down for a cruise there’s pretty much no way in hell I’m going to take a VDB unless there’s a confirmed seat on another flight.

    Or, in a more urgent example, there’s no voucher amount that would take me away from an important family event, especially if its an emergency.

  26. Which is why you have a plane filled with 150+ people. While some have important meetings or family emergencies, with a group that large many will be traveling for leisure.

  27. My final comment on this topic: What if this example were for, say, a ski lift ticket. Let’s say the resort can (for whatever reason) sell only 1,000 tickets. It plans to sell 900 at discount at ski shows, grocery stores, etc. It hopes to sell 100 at full window price. But then it decides to sell 110 tickets at full price, hoping that 10 “discount” skiers don’t show up, and if they do they’ll be happy with 2 lift tickets for next week, or some other token bone.

    Do you know ANY business that operates on such a moronic revenue management model? Yield management is a joke – the airlines really don’t seem to know how to price or market anything. The airlines don’t need to game their own systems, they simply need to figure out (after all these years of deregulation) how to run a business. The airlines that survive will be successful BUSINESSES, not airlines with planes full of passengers, no matter what they paid.

    Just a couple of days ago, Joe Sharkey said it best: “An industry that is despised by its customers cannot prevail.”

  28. Given the stats of IDB VDBs, I wonder how many reported VDBs are really IDBs where the passengers simply wasn’t aware or informed of their rights and were told “sorry, you’re now on the next flight and here’s your free ticket”.

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