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April 11, 2017 Reading Time: 2 minutes

As airlines often do, last week, United Airlines overbooked a flight. But this time, all was not well. Overbooked flights are nothing new. According to the Federal Transit Authority, U.S. airlines convinced over 400,000 passengers to give up their seat on an overbooked flight in 2016. Thousands more passengers were simply not allowed to board an overbooked flight.

Most of the overbooked passengers were compensated without an issue. The airlines compensated overbooked passengers with cash, hotel rooms, and a voucher for the next available flight. However, things did not go smoothly on last week’s overbooked United Airlines flight between Chicago and Louisville.

United needed four seats to transport attendants and pilots to cover another flight. They initially offered passengers $400 to give up their seats. No passengers accepted. United then raised their offer to $800 for a seat. At a price of $800, three passengers gave up their seat. The fourth seat United needed proved to be more difficult. No passengers were willing to give up their seat at $800.

United refused to offer more money. Instead they decided to use force to take the fourth seat from David Dao, a doctor from Kentucky who had refused to give up his seat because he had patients to see the next day. When Dao refused, the airline called in security officers. The security officers dragged Dao out of the plane while horrified passengers filmed on their smartphones.

The smartphone videos went viral, and now United is facing a public relations disaster. United should have just offered more money for the seat. A higher price would have incentivized a passenger to give up their seat. Perhaps $1,000 or $1,500 would have purchased the seat. Dao had placed a high value on his seat because he had patients. If Dao gave up his seat, he would have given up a good chunk of income by missing appointments.

Instead of paying a few hundred dollars more to purchase a seat from Dao or whichever passenger valued the seat the least, United is facing much higher costs. They will likely face a lawsuit from Dao. Perhaps United will have to pay Dao hundreds of thousands of dollars for injuries. The cost to United’s reputation is still higher. Many passengers will probably avoid taking United Airline flights in the future. Investors have already priced in trouble for United, whose stock price has fallen by nearly 4 percent since Monday, wiping out over $300 million in market capitalization. 

Overbooking and compensating passengers is part of doing business. United Airlines made a costly mistake by not using free market principles to obtain the seat. The big takeaway from the debacle is that when prices don’t adjust, markets can’t allocate goods from those who value them least to those who value them most.

Theodore Cangero

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