12 Apr 2017, United States – After United Airlines’ much criticised attempt to “re-accommodate” a passenger on an overbooked Chicago-Louisville flight last Sunday night, we received a number of emails questioning the assumption that overbooking flights increases profits for the US airlines. After all, an airline that frequently overbooks flights could simply be inefficient at aircraft capacity deployment plus having to compensate passengers who are bumped off overbooked flights could lead to less profitable flight segments. Furthermore, frequent overbooking can lead to poor customer loyalty and retention. Interestingly, one of the most profitable airlines in the world, Ryanair (30.6% EBITDAR margin, 40.9% ROE in 2016) has an official policy of not overbooking its flights.
While the relationship between flight overbooking and airline profits is a highly complex topic, a quick look at the US airlines data reveals some rather surprising preliminary observations:
Overbooking flights does not seem to yield higher profits for the US airlines
Overbooking flights lead to higher percentages of passengers being denied boarding. Four US carriers (Expressjet, SkyWest, United Airlines and Delta Air Lines) that have higher than sector average percentages of passengers denied boarding due to overbooked flights also reported lower than sector average profitability in 2016. Whereas six US airlines (Spirit, Alaska, Virgin America, JetBlue, Hawaiian and Southwest) have achieved higher profitability despite below sector average percentages of passengers denied boarding in 2016.
Chart: EBITDAR margin versus % of passengers denied boarding for US airlines (2016)
US airlines that are most efficient at aircraft capacity deployment tend NOT to overbook flights
Efficient aircraft capacity deployment is essentially about being able to place the aircrafts at the right place at the right time. If we use Passenger Load Factor as a measure of whether airlines are efficiently deploying their aircrafts, it appears that the US airlines that are most efficient at aircraft capacity deployment are also the ones that are less likely to overbook their flights.
Three US airlines (Expressjet, SkyWest and United Airlines) that have a higher than average percentage of passengers denied boarding also had below sector average Passenger Load Factors.
Conversely, seven US airlines (Frontier, JetBlue, Hawaiian, Alaska, Spirit, Southwest and Virgin America) that have below sector average percentages of passengers denied boarding achieved higher than sector average Passenger Load Factors in 2016.
[Note that SkyWest Airlines has code-share agreements with United, Delta, American and Alaska Airlines. ExpressJet has code-share agreements with United, Delta and American.]
Chart: Passenger Load Factor versus % of passengers denied boarding in the US airline sector (2016)
Higher Passenger Load Factors lead to higher US airlines profitability
Higher Passenger Load Factors lead to higher profitability for the US airlines. The US airline industry’s average system-wide Passenger Load Factor was 83.4% in 2016. Six airlines (Spirit, Alaska, Virgin America, JetBlue, Southwest and Hawaiian) that were able to drive passenger load factors above the industry average delivered EBITDAR margins above the industry’s average of 23.9% while the four airlines (Expressjet, SkyWest, United Airlines and American Airlines) with Passenger Load Factors below the industry average were also less profitable, delivering EBITDAR margins below the industry average.
Chart: EBITDAR margin versus Passenger Load Factor in the US airline sector (2016)
Ryanair achieves high profitability through efficient aircraft capacity deployment despite more competition and an official policy of not overbooking its flights
Ryanair manages to achieve a 30.6% EBITDAR margin that places it almost on par with the most profitable U.S airlines despite operating in the more competitive European aviation market and an official policy of not overbooking its flights. Ryanair also has the world’s highest Passenger Load Factor of 93% which is considerably higher than the US airline industry average of 83.4%!
Chart: Comparison of Ryanair and the US airlines EBITDAR margins (2016)
Chart: Comparison of Ryanair and the US airlines Passenger Load Factors (2016)
Time for the US airlines to rethink their flight overbooking practices?
More detailed data will be required to reach a definitive conclusion on the relationship between flight overbooking and airline profitability. However, our preliminary but worrying observations that flight overbooking may be symptomatic of inefficient aircraft capacity deployment and more importantly, not necessarily the best path toward higher profits indicate that US airlines may want to re-evaluate their flight overbooking practices.
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