One of the financial tricks in an airline executive’s tool kit is to sell more tickets than there are seats on a plane. If there are 150 seats, sell 175 tickets—people miss flights for myriad reasons and gate agents can typically muster enough volunteers who will take a later flight for a discount voucher.
Yet this process doesn’t play out at JetBlue Airways (JBLU), which has shunned “bumping” since its first flight 14 years ago. “Our traditional mission is to bring humanity back to air travel, and we feel that customers that purchase a seat should get a seat,” spokeswoman Tamara Young says, adding that not overbooking is part of the company’s culture. It seems like a kinder way to treat travelers, but it might not be a smart way to run an airline.
The ultimate goal is to fill every seat on every flight, preferably in the order of who paid the most. Travelers flying on the lowest fares are those who also tend to volunteer their seats for compensation, while customers who pay the most—usually business travelers—can’t be tempted out of their seats. Overbooking pays off, too: Airlines almost always make more from the extra fares than they give back to volunteers in future-travel vouchers. When an airline can’t find enough volunteers—the dreaded “involuntary denied boarding,” as regulators call it—the cost can run as high as $1,300 cash per passenger under revised rules adopted in 2011.
Yet because airlines have amassed years of detailed data on passenger no-shows—down to days, times, seasons, and specific routes—they only rarely need to write customers fat checks. The data also help them to know how to tweak their oversales for each flight, part of the complex algorithms that power revenue-management systems, the backbone of airlines’ fare pricing. As a result, bumping has decreased over the past decade, and is likely to dip further over time.
“Oversales are a way of increasing revenue where the benefits significantly outweigh the risks,” says Trey Urbahn, chief revenue officer of Azul, the fast-growing Brazilian airline. “Airlines have effectively managed involuntary denied boardings to zero.” Urbahn held the same title at JetBlue during a brief stint at the carrier.
Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013, the latest period for which data are available. Virgin America, with a bump rating close to JetBlue’s, oversells only on certain flights and usually limits the number of seats directly to the number of no-shows it expects in coach, spokeswoman Jennifer Thomas said in an e-mail. On the other end of the spectrum, Southwest subsidiary AirTran Airways had the highest rate among U.S. non-regional airlines required to report oversales, with 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).
Several analysts expressed puzzlement over why JetBlue has avoided a common industry practice that can tip a particular flight’s financial performance from loss to profit. The airline also doesn’t advertise its practice, so most people are unaware that it doesn’t overbook—including at least one Wall Street analyst who covers the company. “It’s a bit of a head-scratcher,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. “It’s all about the extra few hundred dollars that can turn a flight profitable, especially when it’s relatively free money.”
JetBlue’s point-to-point network has few connecting flights, and “therefore we don’t have the issue of misconnects driving no-shows,” Dennis Corrigan, JetBlue’s vice president of sales and revenue management, said in an e-mail. Still, that calculus could change as JetBlue prepares to launch its first premium cabin product, called Mint, on New York-to-California flights marketed heavily toward lucrative corporate travelers. That group often purchases refundable tickets to gain flexibility around tightly packed business schedules.
Adding to the pressure for additional revenue, JetBlue has fallen short the past two years on its goal for return on capital and is facing higher costs from pilot raises and more Airbus deliveries. JetBlue’s independent streak has also defied the industry custom of adding more seats to airplanes—boosting revenue, crushing knees—and charging a fee for a first checked bag. Both of those decisions could also lead the airline to reassess its overbooking policy.
Like most airlines, Southwest (LUV) oversells nearly every flight. It carries the most passengers domestically, and in September the airline began enforcing a new rule for no-show customers: The value of the ticket is lost if the passenger does not change or cancel before departure. That change is expected to further reduce the airline’s no-show rate and refine its techniques for oversales.
JetBlue could try to monetize its no-overbooking policy by advertising its benevolence to travelers, but even that may have limited appeal for airline shoppers; in an industry where overbooking is the norm, there doesn’t seem to be large numbers of angry flyers resentful over lost seats. “I’ve just never seen any evidence that people choose an airline because they don’t overbook flights,” says Kaplan.