United Denies Boarding to a Nobel Prize Winning Economist. Does United Fail Econ 101?

As Nouriel Roubini tweeteed, 2013 economics Nobel Prize winner Robert Shiller was involuntarily denied boarding on United Express flight from Denver to Aspen.

United’s Express partners offer 5 flights a day between Denver and Aspen. Troubled Republic Airlines operates four Bombardier Q400 turboprops each day on the route, and Skywest flies a CRJ700 at least once daily. It’s a 181 mile drive.

United offers to pay passengers in the form of vouchers to take a later flight (a ‘voluntary denied boarding’ or ‘bump’). When they don’t have passengers willing to do so, and they have more passengers than they can carry (sometimes because they have oversold the flights, other times because weight and balance issues will restrict them to fewer passengers than they have seats) they will involuntarily deny boarding to the passenger.

The Nobel Prize winner and his wife were each given $1350 as a result of the involuntary denied boarding. Passengers are entitled to quadruple their fare, or a maximum of $1350, if they aren’t given transportation scheduled to arrive at either their first connection or final destination within 2 hours of schedule.

Shiller’s wife makes the simple point that United should have been willing to offer more than a few hundred dollars in voluntary compensation in order to save themselves from paying out $2700 to two passengers.

It would have made more sense for United Airlines staff to offer a larger incentive for passengers (who did not have to be at their destination that evening) to agree to take a later flight, she adds. Virginia Shiller says the staff were only permitted to offer volunteer an amount totaling several hundred dollars, but it may not have been enough of an incentive to persuade volunteers to take a later flight. “It was totally irrational. They probably could have gotten a volunteer to take $2,700. They have these formulas. It’s like something they do in socialist countries.”

Where United Should Improve, and What Other Airlines Have Done

However the fundamental problem airlines face is one of time. They do want to offer the least amount of money necessary to induce volunteers. Three years ago Delta introduced a bidding system. When they think they might need volunteers, they inform passengers at checkin and solicit bids. Then they take the lowest bidders.

Without such a system, airlines offer a fixed amount and sometimes raise the amount offered if they don’t have enough takers. But they don’t go over certain maximums. Airlines also set rigid guidelines, otherwise individual gate agents might offer more than necessary (or face agency problems if they allow the people working the gate to adjust compensation).

Whether or not volunteers are needed, and how many, is ultimately something determined at the last minute based on how many passengers are checked in and present themselves for a flight on time. There are both check-in cutoff times to consider (often just 30 minutes prior to flight) and also late-connecting passengers who are checked in but may not take their seats.

There’s little time to bid up the offer of voluntary compensation. And there’s little time for a Coasian solution, such as paying Shiller $2700 and letting him pay some amount less than that to other passengers on the flight (or for that matter, topping off the maximum denied boarding compensation if it’s really important for him to get where he’s going).

United needs to get better at anticipating the need for volunteers (in this case it appears Shiller was taken off the flight, so perhaps weight and balance issues were in play although there’s an outside possibility this was done to accommodate a very high revenue customer) and preparing by taking volunteers earlier and improving its algorithms for soliciting bumps at the lowest cost the way Delta has done.

Taking their current systems as a constraint — and improving involuntary denied boarding processes is likely very low on the list of needed systems improvements at United — United’s approach probably makes sense.

  • United involuntarily denied boarding to 1647 passengers in the second quarter (.pdf). That annualizes to 6588.
  • If we assume they could have saved $500 per passenger with a more efficient system, that’s ~ $3.2 million per year.

It’s worth getting better here, and there may be savings in out years, but United has much bigger low hanging fruit and likely recognizes there would be substantial IT and training costs to improve.

How Often This Happens, and How to Protect Yourself

In 2014 only 0.08% of passengers were involuntarily denied boarding.

The folks at the bottom of the totem poll, at risk, are those without advance seat assignments. If a flight is oversold, and so seats are available to assign, those are generally the ones who will need others to volunteer or no show in order for them to get onto a flight.

Of those without seat assignments, fare, elite status, and check-in time will determine priority to get a seat among those without a seat assignment. If it turns out the airline needs to pull someone off the plane, similar criteria are used to determine who will be taken off.

Being an airline’s frequent flyer helps. Being on an expensive ticket helps. But the most important thing you can do to protect yourself – which apparently isn’t something that would have helped Professor Shiller in this case – is to get a seat assignment at the time you buy your tickets.

(HT: Loyalty Lobby)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. When you dig down into her argument, it’s not necessarily true. At my old job we had a concept of “force pay” where you got paid double time to work a mandatory overtime shift. This was opposed to the usual 50% extra for standard overtime. What eventually happened was that the company would put out a call for “force pay” for a given shift and suddenly there were a lot of volunteers. Everyone caught on that eventually a shift will be given this incentive and no one would pick up extra shifts at standard overtime. This likely cost the local branch 6 figures annually in extra wages.

    If the airlines do the same thing and let folks volunteer for IDB-level compensation then passengers may get smart to it and start holding out for the full $1350 each rather than volunteering at lower levels (or $900, $1000, whatever). The reason that $1350 is so high is because it is involuntary and to let someone volunteer for it would defeat the purpose. A bid system can certainly help this problem.

  2. my experience with AA denied boarding was much worse

    confirmed in emergency exit window seat for JFK-CDG, asked for volunteers, i volunteered, they gave away my seat to someone else, then in the end because of no shows they didn’t need my seat, but since it was given away, i was re-assigned a crappy one next to the galley and the lav some light on the whole night across the atlantic

    basically i signed myself up for a much worse seat in exchange for $0 compensation

  3. Can they change my seat from Main Cabin Extra that was offered to me free for Anytime award seat 20,000 miles one way SEA-MIA? I only spent the miles because of the one remaining Window MCE seat offered free, so I can sleep more comfortably on this red eye in Nov. I get a queasy feeling they can give it away to a paying customers although AA assures they won’t. I wouldn’t even want the red eye if they did. Is this now a normal perk for Anytime awards?

  4. The issue is not the lack of a bid system, the issue is the maximum a UA GA can offer. Heck, DL has the bid system, but generally they don’t use it. DL GA’s and supervisors are simply empowered to offer more because they know the max is $1,350 in potential real money should there be an IDB.

    I’ve seen UA hold firm multiple times at $300 or $400, take a delay to beg for volunteers, and then IDB someone or some people.

    Or I’ve seen them hold firm at low amounts, refuse other carrier rebookings, and suggest lousy UA metal rebookings (e.g., 24+ hour impacts) into leisure destinations.

  5. Name your own price to take a bump? They need to think this through. Pretty soon rogue travel hackers will be buying tickets by the bundle, stuffing airport waiting rooms with homeless stewbums and bindlestiffs hired as stand-in passengers. Cost of doing business is some hobo will wind up under a bridge in the Hamptons.

  6. I bet the airlines could do it quite cheaply if they allowed people to volunteer at the time of purchase: you get to pick your seat if you volunteer to be bumped, or by selecting the cheapest fare you volunteer to be bumped, or give some other low cost benefit. I’ve often wished an airline would call me and ask if I’d like to take a later flight. I would do it for free in those cases I preferred a later flight. Would’ve been a win win, but this information is not captured anywhere.

  7. They should figure out some bid system otherwise the perennially overbooked flights will be a light to the bugs. I used to fly DL FLL – ATL all the time and the cruise ship traffic almost always left flights oversold. I’d either get upgraded or bumped voluntarily, either one was a win for me. In fact, I’d ALWAYS approach the gate agent and offer my seat just as the agent arrived. And I didn’t even have any sort of lounge access back then, $500 vouchers made it worthwhile to wait another hour or two for the next plane.

  8. Also, just grab a car and make the drive. Yes it’s a bit long but wow, that’s a nice drive on I-70 (unless it’s snowing…)

  9. “get a seat assignment at the time you buy your tickets” – Can’t speak for United, but on Delta, you frequently aren’t allowed to select a seat until around 24 hours before boarding on a number of the regional served flights.

    Of course for that kind of money, I would have hired a nice limo.

  10. What about Patricias case? They shouldn’t be allowed to get away with it. Once you accept a volunteer, that’s it you pay them and done. Or give them the original seat back. I hope you stole the blankets.

  11. Is there any reason why you pick on how UA does IDB and VDBs in the article (after the specifics of this story) when AA handles it the same way? The article reads as though UA has a SPECIFICALLY bad way of handling this…when its pretty much industry standard other than DL, and even DL handles it this way when they don’t have enough auction volunteers.

  12. @joelfreak – the interesting thing here is less United, and more a Nobel Prize winner and his wife critiquing the economics of how involuntary denied boarding is handled. Although I’d say that they’d be more right vis-a-vis American than United (who does IDB more often than AA does)

  13. I just returned from an economics conference at GMU Law. As I checked in for my return flight, up popped Delta’s “we think the flight might be oversold” bidding screen. Choices ranged from “No thanks” to $500. With opportunity cost, demand curves, the Coase Theorem, etc. fresh in mind, I decided that my time was worth more than the future value of $500 in short-lived (one year) Delta Dollars. However, I think there would have been time for a quick Coaseian auction over the PA (assuming no one bit at Delta’s “pre-auction”).

  14. I was recently in the same situation on a flight from Newark to Denver on United. They lied and said that I didn’t show up to the gate where I had been patiently waiting for eight hours and followed all instructions. I could sue and it wouldn’t even cost me any legal fees since I’m a lawyer, but the money isn’t worth the effort and in general, it is common practice for airlines to flout the law and it is common practice for airlines to improperly claim that someone was voluntarily bumped or was bumped due to their own fault when they weren’t (in part, because they known that they are unlikely to be called on it). Compensation rights also do not appear to include a right to attorneys’ fees, which airlines have a strategic incentive to pay to discourage claim making in general, but which passengers generally have only an economic incentive limited to their individual case to incur.

    When you consider that they likelihood of actually having to pay up $1,350 a head is perhaps 5% tops, and that almost all of those people if they sue to enforce their rights are making their own strategic and economically irrational choice, that changes the economics a great deal and drives the otherwise seemingly irrational practices of the airline.

  15. Please do sue them and make it very public. If exposed on this even one time widely enough, they will likely need to revamp their policy and be much more open – or at the very least not make lying their policy which is wide open to embarassing public exposure. Are employees subpoenaed to court going to keep the lie going at the risk of prison time for perjury? One good case like this and the whole house of cards will fall. You sound like you’re in the position to do it best. Maybe Gary will back you up.

  16. “Ahh… Airlines, where logic goes to die…”

    Also, to the extent that United Airlines is acting irrationally, there is a reason for that. United recently did two things – it merged and it adopted a new booking-seating-reservations computer system that is full of bugs and ill understood by the airline itself (it also fired the established luggage handler in Denver with a new cheaper one that didn’t know what it was doing and screwed up a lot). When the new computer system came on line, the amount of overbooking, lost luggage, etc. plummeted in a company that had historically been a industry leader.

    The poor management of the transition was due in substantial part to the fact that the lawyer who brokered the merger deal was the CEO and he didn’t have the skill set to run the operations of one of the largest airlines in the world during a difficult transition period. He was recently canned in favor of someone with a better skill set on an interim basis, but the damage from the ill managed IT transition has been done and is going to take some time to fix. You can appreciate just how incompetent this CEO was by considering extreme rarity with which a CEO is involuntarily fired for incompetence by a board of directors that put him there in the first place, which is usually as compliant with management desires as a federal grand jury following the lead of a U.S. Attorney. More CEOs are removed for strokes and Alzheimer’s disease than they are for screwing up.

    The Econ 101 assumption that firms act rationally in their own best interest is helpful in forest level analysis, but Econ, in general (aside from a little corner here and there that everyone else in the discipline ignores) gives insufficient weight to sheer management incompetence, bad business decision making, and personality driven mendacity.

    This is fine when you have a market place made up of small and medium sized businesses where the law of averages means that the market only experiences an average level of management incompetence. But, when you have a very large enterprise that is a dominant player in the market, incompetence comes not in bite sized averaged out amounts, but in ginormous all or nothing chunks driven by decisions made by single individuals that have the potential to influence the industry averages as a whole.

  17. I think what happened to Bob Shiller and his wife was pretty efficient. IDB is rare and the compensation generous. They could have gotten a limo to Aspen for something like $600 and kept the rest of the money. If the employees’ and other passengers’ time were worthless, you could organize and operate the auction required for a Coaseian solution but there are huge costs to not getting the plane in the air roughly on time and getting another plane into the gate. United, not the Shillers, would pay these costs, as would passengers in other cities inconvenienced by the knock-on delays. It’s pretty clear to me that UA has thought about this situation and that their solution meets the “pretty good” test.

  18. Don’t forget that airlines cheat in reporting the number of involuntary denied boarding. One of the latest DOT orders fining AA actually says that they caught AA doing exactly that.

  19. Getting bumped is highly annoying, especially if you have time critical arrangements based on the airline getting you there on time. Involuntary bumping is, however you look at it, a consequence of mismanagement. That has to e paid for and the higher the price, the greater the incentive to manage the airline properly!

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