TWA Fan 1

First, kudos to you for a very informative analysis.

Second, I agree with your findings but I would just repeat that the likelihood of IDB/VDB on any airline is very low. Per your calculations, total denied boardings on CO were 0.1197%, so 1 out of every 1,000 passengers. IDB's were 15% of this rate, or 0.017955% or approxinmately 1.8 out every 10,000 passengers.

It would be terrific for this rate to be zero and you know I agree with you that CO is too stingy on compensation (of course, I think there are plenty of areas where CO is too stingy).

I think we all know why CO is stingy, but as a matter of basic approach there is a point where being too stingy affects a company's ability to retain its customer base. Even in the airline industry...

Billiken

I do agree that bump compensation is gate-agent/red coat dependant.
In March I was on a CLE-STL (RJ) flight. The VDB comp was $500 for this under-2 hr flight with 3.5hr re-route delay. Channa's EWR-SJU flight was only $300 and then they IDBed a family of 4.

As Channa's analysis points out, CO truly IS stingy with bump compensation.

MIA-SAT

I remember well $800 vouchers and good hotel accomodations for each of the two back to back voluntary bumps that I took about 6 years ago on CO out of SAP. As much as I like putting the vouchers in my pocket, you cannot argue with success and CO's quarterly profits in the most recent quarter have to be due to some changes. One of them has to be a change in policy on voluntary bumps.

The figures are quite interesting and helpful, it is particularly helfpul to know that the $300 ceiling is even firmer than I thought it was. All of this information will be used by me and my family this year when we plan our Thanksgiving return from STL, we book a morning flight to IAH, the flight is always oversold and the last two years we have received $250 or $300 per seat vouchers. Even better, in one year, they moved us to the direct flight on AA and we returned earlier than we would have on CO. Last year we told them at the checkin counter that we figured that they would be oversold, so we asked them what the compensation would be if we volunteered. I just hope that the revenue management people continue to get this one wrong.

channa

I have to disagree on this one. Keeping the screws down on the VDB compensation while allowing more IDBs is extremely foolish and has a negative hit on earnings. Had they paid out less IDBs and written more vouchers, the earnings would have been better.

If each of CO's 1,919 IDBs were paid out $400 cash, the IDBs cost the company $767,600. Granted probably not everyone got the $400, but this is still quite a significant expense, in cash, right off the bottom line.

Remember my SJU example, they did not want to pay out more than $300 in VOUCHER per person, which caused them to have to pay out $400 in CASH to the four (4) affected IDB folks.

So what they paid out was:

2 x $300 voucher = $600 voucher (us)
4 x $400 cash = $1,600 cash
------------------------------
$2,200 ($1,600 cash + $600 voucher)

Had they increased the VDB compensation to $400/pax, it would have been 6 x $400 = $2,400 all in voucher because they would have secured their volunteers.

Are you saying that $1,600 in cash + $600 in voucher is better than paying out $2,400 in voucher? In other words the company would rather pay out $1,600 in cash to avoid writing $1,800 in vouchers? I think the cash option has a bigger hit on the bottom line, because the vouchers could potentially go unused, partially used, or be used to drive additional business (more expensive tickets than the voucher value).

I think CO's got it wrong on the $300 domestic cap. That was fine 2-3 years ago when you could go pretty much anywhere domestically for $300. Now that's no longer the case, and it's less enticing to travellers if the reaccommodation is not ideal. They need to loosen the screws a bit on this one.

J.Edward

Also in addition to what channa said, companies rarely are obliged to pay the full amount on vouchers/gift cards/etc. People forget they have them, people may not use the voucher to its entirety (remember CO vouchers have no residual value ), etc and companies love stored value cards for this very reason. So while CO may issue $1,000,000 in vouchers during a fiscal year, chances are the "cost" of that liability, realized through offset cash collections on ticket sales, will not amount to anywhere near $1,000,000.

ryerflyer

As stated before, jetBlue has a policy of not overbooking so their "Denied Boardings" rate for the latest period available (April-June 2006) is 0.13 per thousand passengers enplaned.

Well, if you are one of those 0.13, then you have been bumped!

afrugal1

Me no like STINGY!

To J.Edward's point, not many vouchers [$300 or otherwise] actually get zeroed out. My guess is that most voucher purchased tickets will be for less than the residual-less voucher's original face value. Float, float, float!

MIA-SAT

[QUOTE=channa]I have to disagree on this one. Keeping the screws down on the VDB compensation while allowing more IDBs is extremely foolish and has a negative hit on earnings. Had they paid out less IDBs and written more vouchers, the earnings would have been better.

QUOTE]

I disagree although I understand your point. More than once I have seen CO passengers accept what I consider absurdly low voucher offers, sometimes in the $100 to $150 range. If passengers perceive that the offer is only going to go so far, they tend to accept what is offered. You would not take a $150 voucher (based on your response) and neither would I. If CO flyers think that $800 vouchers could be offered, some may sit on their hands waiting for a better offer. The consumer perception that the offers can and will go only so high can be a tipping point to get them to take the lower offers. For this reason, Co may reasonably believe, (or based on prior history and studies may actually know) that in the long run the inability to cover all needed seats with the $300 cap, and thus the need to pay involuntary compensation, is actually cheaper than allowing its flyer base to perceive that the limit is much higher. In short, the mathematical calculation which you provide, while certainly logical, does not take into account the effect that the perceived $300 cap has on getting passengers systemwide to take vouchers.

channa

Good point, and I understand the concept of a cap. But shouldn't that cap be sufficient enough to get the volunteers you need? With such a high IDB rate and percentage, it's clear that CO's cap isn't high enough for many instances (15% of their bumps are invols). Also, I think the voucher cap should be at least on par, if not more than, the amount they'd be required to pay in cash ($400 in most cases). At face value, it just seems illogical to offer $300 in voucher, then turn around and pay out $400 in cash because nobody took your voucher. At a minimum, the cap should be $400 (or possibly $500 as an enticement to encourage people to take the voucher over the cash). My mom was once offered a choice of an $800 LH voucher or $400 cash. With a spread like that, it really makes you think whether you want the voucher or the cash.

MIA-SAT

Key point in your reply is that Joe and Jane average passenger have no clue that if there are enough volunteers that $400 has to be paid and they are still going to get to their destination. If someone held up a sign in front of the gate of an overbooked flight and showed customers what had to be paid to the unlucky persons if there were no volunteers, CO, and others, would have to pay more out. Think how often the airlines take advantage of ignorance of passengers to increase revenues. I have heard many times the announcement "If we do not get enough volunteers, we will have to . . . . ." In fact if you were a person with a confirmed space but no seat, you could stand by the counter and hand out a few (but not many) 20's to deter potential volunteers to get your $400. When my family of four flies, it would be $1600 for us and we would still eventually get to our destination.

The fact that airlines rely on consumer ignorance drives customers to boards such as this one. While trying to read the mind of CO's revenue department is difficult, (as many threads in this forum will attest), they may think that going to a universal $400, once the customer base gets wise to it, will cost them more in the long run.

rkkwan

Speaking of Jetblue, their loading factor for July 2006 was 83.9%, compared to 91.1% a year ago. It's one of few airlines that see a drop in LF this summer. Everybody else seem to be getting record load factors.

entropy

thats bad news for B6.

But it is quite bad that CO is paying more in cash than vouchers. The cash goes out of the cash register now. Not later. $400 gone.
With a voucher, they have the following scenarios:
a) pax volunteered, so pax is happy that they got some 'free money'.
b) Pax buys a ticket less than the value of the voucher. $ 'lost'(missed revenue) by co is less than the $ of the voucher. There are two scenarios here, a pax may have taken a trip they would not ordinarily take because it is 'free' (so no real revenue loss), or they are a frequent flyer anyways.
c) Pax buys a ticket more than the value of the voucher, Co gets incremental revenue.
d) pax misplaces/forgets about/throws out/waits over a years, which probably happens quite a bit. CO gets off scott free.

none of these cases is "worse" than losing $400 CASH right off the bat.

AVIZ

I'd have to guess they are really come close to breaking even with the vouchers. Here is how I figure:

-A business traveler (or someoene like us who knows this system) will probably use the voucher towards a higher fare class. For me, it's great to fly in H class to TLV- more miles and no surcharge to upgrade with miles. Only 3-500 dollars more, but when I'm buying a $1000+ ticket, it adds up. I think all 4 vouchers I've ever had were used exactly for this.

-The average american bought a ticket on CO because they went online to Orbitz and CO was $11 cheaper than AA to LAX. Frankly, they couldn't care less who they are flying with. Service? FF miles? In their minds who cares! Just get me to California to see my great Aunt Faye. When they take that $300 voucher they are forced to come back to an airline they would otherwhise never travel with again (unless of course CO had the lowest fare for next years yearly trip-wherever it may be). Maybe this year there's a husband, or a kid in the picture- REVENUE for Continental that otherwhise would be in the pockets of the lowest priced competitor.

-It sounds crazy but I'd have to bet close to half of these IDB/VDB vouchers are never used. They get lost and folks simply lose track of time. Keep in mind...we are the minority of travelers. I'd love to know what percentage of people that fly CO are members of One Pass. I work with some folks that fly 5-6 J class International flights a year, yet have never accrued a single mile. Think about what they are losing out on...sounds crazy! How many BILLIONS of dollars are spent on credit cards that DON'T earn points/miles.


In the past six months I have not gotten bumped once, even on some of the busiest travel days of the year. It's simply a luck thing and really can't be planned out like in years past. It works out for the airlines in more ways than we realize. I don't believe CO is losing anything close to 1 million dollars on vouchers. It's simply impossible...

..Cash however.....

TWA Fan 1

As stated before people get bumped on B6 but not as a result of overbooking, unlike CO and all other legacies.

TWA Fan 1

B6 has increased their fares and while LF is down, yields are up considerably. Btw, B6 LF is still the industry leader.

Overall, I think the right move.