Although this is an extreme event, a glimpse of the whole leopard shows many problems in airline management. Overselling is a common practice in the aviation industry all over the world, and it is also a part of revenue management. Revenue management is always mentioned in the MBA operation strategy course I teach. Every time I talk about revenue management, I will explain some interesting phenomena in the aviation industry to my classmates with examples. It seems that there will be another wonderful case provided by United Friendship in the next class, especially their new competitive strategy "If we can't beat our competitors, we will beat our customers".
Seeing the United Airlines incident, many netizens must be thinking: Why are airlines oversold (selling more tickets than seats)? What should airlines do if there are more passengers waiting to board the plane than seats? Why doesn't the government protect consumers and prohibit over-selling? This paper answers similar questions from the perspective of revenue management, hoping to help you understand the background of the United Airlines incident.
Many people may not know that the aviation industry is one of the most difficult industries to manage in the United States, and it can also be said that it is one of the least profitable industries. From the deregulation of 1978 to the bankruptcy of more than 60 airlines in 2005 160, mergers and acquisitions are common. During the period of 1990-99, the profit rate of the aviation industry was one sixth of the average level of all industries in the United States; The terrorist attacks on 200 1 and 9 1 1 immediately caused heavy losses to most airlines. Why is it so difficult for airlines to make money? There are many reasons, here are a few. First, the number of supplies is fixed for each flight, because the seats on the plane are given. Second, for every flight, the demand is complex and changeable (the number of people who need to fly a flight depends on many uncertain factors, such as weather, major events, economic prosperity and so on). ); In addition, each passenger's willingness to pay is different, and preferences and needs may change with time). Therefore, how to sell the given supply to the dynamic demand and maximize the income is a very difficult problem. Third, the competition is fierce. What passengers need is to get from place A to place B as quickly as possible, and the services provided by any airline are essentially difficult to distinguish (although United Airlines can successfully distinguish itself this time). Because products and services are not easy to differentiate, price wars are hard to avoid. A few years ago, the boss of an airline said in his report that he would rather lose money than leave room. Indeed, sometimes we can see ultra-low-priced tickets for a few dollars. But think about it carefully, excluding the fixed cost of a flight (fuel cost, personnel cost), what is the marginal cost of serving one more passenger? Just a coke. Therefore, once the plane breaks even, airlines can reduce the fare to almost zero to attract one more passenger.
It is precisely because of the above reasons that in recent years, airlines have used various means to charge passengers to improve their income. For example, baggage check-in, seat replacement, food, pillows and blankets are all charged, and luxury economy class is also charged. Once in class, a student said that she had to pay for going to the toilet, but there seemed to be few such examples. What's more, some airlines are considering selling station tickets (for example, Ryanair in Europe, and an airline in China once threatened to "sell station tickets if the government approves"). Of course, the corresponding seats will also be designed as standing seats. Standing tickets can increase the supply of an aircraft and provide a variable number of seats (which can better meet the uncertain demand), but it has not happened in reality so far (it may be difficult to solve the security hidden danger).
Where there are challenges, there are opportunities. Facing the dilemma of airlines, revenue management (also known as revenue management) came into being and developed rapidly. The core of revenue management is how to maximize revenue under the condition of fixed supply and uncertain demand. In order to achieve this goal, enterprises can use two means: dynamic pricing and capacity allocation. Many people may notice that the fare of each flight changes with time. If you ask the passengers around you on the plane, you will find the same seats, the same terms, and everyone pays a completely different ticket price (because the purchase time is different). In other words, airlines can change their fares (dynamic pricing) according to the sales situation and the update of information. Resource rationing is another means to maximize income. At any price, airlines don't have to sell all seats, because tomorrow someone may be willing to pay a higher price for the same seat. At each time node, how many seats should be sold or how many seats should be reserved for the next node is also an important decision in revenue management. Because dynamic pricing and resource allocation are extremely complex stochastic dynamic optimization problems, in reality, fast and effective algorithms and powerful computers are needed to give the optimal decision, so I won't go into details here. It is worth mentioning that revenue management is not only in the aviation industry, but also in many other service industries, such as hotels, car rental, sports and entertainment.
So what is the relationship between oversubscription and revenue management? From the perspective of airlines, overselling is an inevitable way to optimize revenue. The direct reason is that consumers temporarily cancel orders or don't show up at that time. Note that the capacity of the service industry is time-sensitive, and the empty seats after the plane takes off or the hotel rooms after arriving at night are pure waste, which is an irreparable loss for the enterprise (note that even if the enterprise does not refund the money to the consumers who have not kept the appointment, the wasted empty seats are also lost opportunities, because it is entirely possible to sell the seats to another consumer). According to statistics, the failure rate of American aviation industry can reach 15-20%. In order to avoid and minimize this loss, every airline in the world will oversell, that is, sell more tickets than the number of seats. The decision on how much to oversell depends on historical data of missed appointments and strategic considerations of different companies (interested readers can refer to any revenue management textbook).
The ideal result of overselling is that the number of passengers who do not appear is exactly equal to the number of oversold, so that the plane is just full and everyone is happy. If the number of passengers who do not appear is greater than the number of oversold passengers, there will be a waste of empty seats on the plane and airlines will bear the opportunity loss. But if the number of passengers who don't show up is less than the oversold number, that is, there are fewer seats on the plane than those who want to board the plane, then the trouble will come-someone will definitely not be able to board the plane. What will airlines do at this time?
Although the United States Federal Aviation Administration allows overselling, it has certain regulations on how to deal with the consequences of overselling. First of all, airlines must first seek volunteers; ; It is said that after the United Airlines incident, the famous Webster's Dictionary jumped out and redefined the word volunteer. This time, United Airlines will also provide compensation to find passengers who voluntarily change to the next flight. Of course, the compensation terms of different companies may be different, and there may be some tricks in it (for example, United Airlines' $800 compensation may not be cash, but a coupon that can be used to buy United Airlines tickets, and there may be additional restrictions when using it). If there are still not enough volunteers with high compensation, then the embarrassing situation will come, and the airline must select some guests to make departure orders (unfortunately, the selected passengers are called bumpee). The general company will choose according to the guest level (whether it is a loyal member), reservation price (whether it is discounted) and check-in time. Note that first class and business class are generally not oversold, so these passengers do not have the problem of being rejected. On the contrary, if there are vacancies in business class, airlines may upgrade some economy class passengers to business class, but generally give priority to passengers with loyal membership level. Once in class, I asked my classmates if they had any experience of bumping into each other. One student said that he was asked to jump from economy class to business class. I told him it was an upgrade, not a bump.
In revenue management, it is also a difficult decision how much compensation to provide to volunteers or bump passengers. On the one hand, the compensation should not be too small, otherwise no one is willing to change flights or cause consumer dissatisfaction. The first mistake of United Airlines this time was that it was too stingy to continue to raise compensation and solve the problem in a voluntary way. According to the air traffic control law of the United States, the maximum compensation this time can reach $65,438+0,350, but the price increase of La Salle will not be increased until it reaches $800. On the other hand, the compensation should not be too high, otherwise it will cost unnecessarily high. In addition, some very strategic consumers will take advantage of loopholes. These consumers will deliberately order crowded flights, and then expect to get free air tickets or other high compensation after sale. Such consumers are called professional beggars. There are even some websites that offer ticket sales for various flights and summarize how to get a bumpy experience.
In my operation strategy class, many students shared interesting experiences of overshooting and being hit. An airline needs to find volunteers, but many passengers volunteer because of good compensation conditions. In order to be fair and save costs, the counter attendant gives each volunteer a note, writing down the amount of compensation they are willing to accept, and then the airline can choose the passenger who asks for the least compensation. This is a disguised auction mechanism. I think this is a very clever approach. For example, United Airlines needs four passengers for this bump, so it will be more acceptable to select more than four candidates and let them bid.
Since overbooking brings so much risk to consumers, especially a very bad experience, why don't government departments ban airlines from such a strategy? The answer is twofold. First of all, in the final analysis, overselling is good for most consumers. If overbooking is not allowed, the vacancy rate of airlines will be higher. In order to make a profit, airlines will raise fares, and ultimately consumers will pay the bill. Second, overselling is beneficial to social welfare. As a whole, we need to make the most effective use of resources and avoid waste. So every plane should be as full as possible, otherwise every empty seat is a waste of resources (those passengers who don't fly may change to other flights or choose alternative means of transportation, which will consume resources anyway). But how to control the specific operation of these airlines is a topic worth discussing. For example, a major mistake made by United Airlines this time is that passengers should not be ordered to leave after boarding. If the passenger who was hit had been selected before boarding the plane, things would never have come to this (it is hard to imagine that there will be passengers rushing to board the plane). This practice of United Airlines may have violated the regulations. Even if it is not illegal, it is unreasonable to drag people off the plane alive later.
The United Airlines incident will make overselling the focus of controversy for a period of time (in fact, it has always been controversial), but it will continue to exist in our lives if there is no accident. What do we need to know as consumers? First of all, overselling or even bumping is not a high probability event. The data shows that about 1000 people will be affected by overselling (voluntary or involuntary flight change), and about 1-2 passengers per 1 10000 people will be bumped (involuntary flight change). So there is no need to be too nervous about this Manchester United incident.
Secondly, if the oversold is unfortunately selected, you can calmly put forward your own requirements and negotiate with the other party to solve them. I believe that after the United Airlines incident, all airlines will pay more attention to the interests and needs of passengers and let them get satisfactory compensation. According to the provisions of American Aviation Law (CFR250.5), if passengers are delayed within 2 hours because of changing flights, they should pay at least 200% of the ticket price, with a maximum of $675. If the delay exceeds 2 hours, at least 400% of the ticket price will be compensated, with a maximum of $65,438+0,350. In fact, sometimes, if the time is flexible, changing the flight can not only get some compensation, but also help the emergency, so give it a try. Of course, choosing a good airline can also avoid unpleasant experiences. For example, Southwest Airlines has just launched a new advertisement to ensure "flying to the southwest without being beaten!" Indeed, the United Airlines incident seems accidental. In fact, the fundamental reason is that there is a problem with the company's consistent service culture, that is, there is no awareness of respecting consumers from the bones. Imagine that if it is the corporate culture of Southwest Airlines, even if it is oversold, it is impossible to treat passengers so rudely. The United Airlines incident is unfortunate, but it will definitely make every airline rethink and improve its overbooking strategy and even corporate culture, and ultimately benefit every passenger, including ourselves!