Like many other industries, airlines may "oversell" or offer for sale more seats than exist on the aircraft. Concert and Sporting events will offer standing room only, Hotels will oversell the number of rooms available and Rental Car companies will offer more reservations than available cars; and, many many more instances.
The short answer is that people blow off their flight, event, appointment, room night and as disposable items, once the moment has passed the opportunity for revenue has expired. "No-Shows" are a common theme in these industries and more.
Focusing on the airline industry here, each carrier has developed a sophisticated program based on trends, history, time of year, travel patterns and about 20 other parameters to determine the correct percentage of inventory to make available. Some flights may not over sale at all, where weather and airport conditions limit or even cause flights to depart with empty seats due to performance factors; others, on some International routes may over sell by 20, 30, 40%, where fare rules, competition, culture and historical trends reflect substantial no-show factors. To assure a flight departs full, and thus creates revenue, it may have 220, 230, 250 reservations for a 170 seat capacity aircraft.
It is the double edged sword. To assure revenue and reduce waste, over selling is a time tested practice. The alternative would be fully non-refundable tickets or far more restrictive fare rules and policies. It will also greatly reduce the ability of airlines and passengers to recover from weather events, delays and cancellations.
WHAT ARE THE RULES
The United States Department of Transportation (DOT) have enacted guidelines and regulations inline with International Conventions and Agreements for the performance of Air Transportation. Domestic and International rules and regulations differ and I will focus on US Domestic flights for purpose of this discussion which are quite clear.
In the event of an over sold flight, each air carrier is required to solicit for volunteers. If you have traveled much, especially during high volume travel periods, I am sure you have heard "Ladies and Gentlemen, our flight today may be in an over sold situation. If you have flexible travel plans, we can offer compensation in the amount of $XXX in travel credits and a seat on a flight departing at . . . . ." The very high majority of the time, enough volunteers are received and often have to be turned away. This is referred to as Voluntary Denied Boarding Compensation (DBC).
In the event your carrier is not able to solicit enough volunteers, it will be required to Involuntary Deny Boarding (IDB). Each carrier has a different protocol, under the guidelines of the DOT, as to who is selected to be Denied Boarding and the penalties can be steep. The process is totally automated and not reflective of any profile, feature or other identifying trend. Some simply go by the last person to have checked-in.
If you are denied boarding and your carrier is not able to accommodate you to your final destination within two hours of your original arrival time, you may receive compensation equal to 400% of the original one-way base fare up to $1,300. Before you grin and plan your next pay day, IDB's are very rare and passengers do have responsibilities. You must check-in prior to published cut off time (30-60 minutes) and you must be on the aircraft prior to published time (10-30 minutes). If you arrive at the gate less than 10 minutes prior to departure, you are not eligible for any compensation.
In the event this occurs, transportation is limited to first available flight on the carrier which has denied you boarding only, you are not eligible for hotel accommodations or other compensation. Also, if you are denied boarding and your air carrier can get you to your destination within 1 hour of your original scheduled arrival time, you receive zero compensation.
Here are the rules from the DOT website:
http://airconsumer.dot.gov/publications/flyrights.htm#overbooking
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