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OM in the News: Jet Blue’s Unique Revenue Management Strategy

February 13, 2014

jet blueOne of the financial tricks in an airline’s tool kit is to sell more tickets than there are seats on a plane. If there are 150 seats, sell 175 tickets—people miss flights for a myriad of reasons and gate agents can typically muster enough volunteers who will take a later flight for a discount voucher. Yet this process doesn’t play out at JetBlue Airways, reports BusinessWeek (Feb. 5, 2014),  which has shunned “bumping” since its first flight 14 years ago. “Our traditional mission is to bring humanity back to air travel, and we feel that customers that purchase a seat should get a seat,” says the firm’s spokeswoman. It seems like a kinder way to treat travelers, but it might not be a smart way to run an airline.

The ultimate goal is to fill every seat on every flight, preferably in the order of who paid the most. Travelers flying on the lowest fares are those who also tend to volunteer their seats for compensation, while customers who pay the most—usually business travelers—can’t be tempted out of their seats. Overbooking pays off too: airlines almost always make more from the extra fares than they give back to volunteers in future-travel vouchers.

Yet because airlines have amassed years of detailed data on passenger no-shows—down to days, times, seasons, and specific routes—they only rarely need to write customers checks. The data also help them to know how to tweak their oversales for each flight, part of the complex algorithms that power revenue-management systems, the backbone of airlines’ fare pricing. Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013. On the other end of the spectrum, AirTran Airways had 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).

Classroom discussion questions:

1. Should Jet Blue overbook, like other carriers do?

2. What other service industry overbooks?

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