Would More Compensation for Airline Bumping Benefit Fliers?

It has happened to many of us. You rush to get to the airport, take off your shoes and out your laptop for security, then fast-walk to the gate -- only to learn just before boarding begins that you've been bumped. You mutter an expletive to yourself, but take some comfort in the fact that you've been compensated and will be on the next flight out. The government is trying to up that monetary remedy, but the solution could cause a worse problem for travelers: a higher cost of flying.

The Department of Transportation is proposing to increase the limit of what an involuntarily bumped flier could be paid by an airline to $650 from $400 if your next flight is within two hours and to $1,300 from $800, if the flight is more than two hours later.*

This might be confusing, as limiting compensation sounds like the airline has some discretion. It doesn't: it must pay whatever the ticket price is -- up to that limit. For example, if you get bumped to a flight one hour later, and your ticket cost $500, then you would only get $400 under the old plan. Under the new plan you would get the entire $500 -- up to a ticket price of $650.

At first, this sounds great. Better compensation for the involuntarily grounded customer -- that's fantastic! But it's important to look at the big picture.

Why do airlines bump people anyway? It isn't because they enjoy watching their customers squirm; it's because overbooking flights is a profitable practice. Cancellations, no-shows, and schedule changes are fairly common. In order to make sure that an airline has its flights as full to capacity as possible, overbooking prevents those last minute changes from resulting in empty seats.

If you add to the cost of overbooking by increasing the compensation for bumping, then airlines won't overbook by as many customers or as often. The result? More empty seats on flights that could have otherwise been full if they were oversold.

Imagine a situation where an airline decides it needs to stop overbooking, because it's no longer profitable, due to the compensation changes proposed today. If every empty seat results in the airline making $300 less is profit, and a flight has five empty seats, then it loses $1500. If the flight has 150 other passengers, then the airline has to spread that cost among them to make up its loss for the flight to still be as profitable. It would have to increase ticket prices by $10 per passenger.

Think about the opposite scenario: where the airline decides to stubbornly continue overbooking and ends up having to involuntarily bump passengers and pay up to the new limits. This time, it bumps three customers, and the next flight isn't for more than two hours. Its costs for the flight would again be $1,500 greater than before. Like in the prior scenario, the other 150 passengers would have to pay $10 more per ticket each to make up the difference.

Of course, these are just fictitious examples, but the theory holds. Whether this new policy causes airlines to overbook less or pay higher fines to those they continue to bump, ticket prices will have to increase across-the-board to make up the difference.

There is another possibility, however: higher change/cancellation fees. That would better compensate airlines for empty seats if they are forced to curb their overbooking. Given the desirability of having some flexibility in travel, this prospect isn't likely to excite many fliers either.

Less involuntary bumping is a worthwhile end, but it won't come without travelers ultimately paying for the benefit. They'll face either higher prices or bigger change fees.

* This is for domestic flights. For international flights, the time line extends out to four hours.