Airlines lose legal challenge
The airline industry has recently been to court (represented by the IATA) in an attempt to reverse some new European legislation that forces them to pay compensation to passengers stranded because they were denied boarding or because their flight was cancelled. They failed. Here's an example of how the European machine can get it right.
Airlines have traditionally relied upon certain contract clauses to acquire rights that would be considered unreasonable in any other industry. For example, they are entitled to overbook their flights on the basis that some people do not turn up, and therefore their seats can be reallocated to others. For a flight with 200 seats, they might therefore sell 210, and get the revenue for 210 individuals. If 205 passengers show up, the airline can send 5 of them packing at absolutely no cost to itself, thus pushing the entire cost of overbooking onto the passengers that are turned away. These passengers will suffer much more than the airline would have by not overbooking, as it's possible their entire holiday will be ruined, or that they will miss an important meeting. This judgement appropriately reallocates that cost back to the airlines by forcing the airlines to compensate individuals for their inconvenience.
The low-cost airlines are arguing that they may be required to pay back many times the value of an airline ticket because the compensation amounts are based on the distance of the flight rather than the amount paid for the ticket. This also is a convenient logic for the airlines, but fails to reflect the immense cost of being stuck far from home, which in reality has nothing to do with what you paid for the ticket.
If an airline sells me a ticket to go from A to B, I expect to be taken there, and if they are unable to provide the service they have promised, and upon which I am now reliant, they should expect to have to pay an amount commensurate with the damage they've caused, rather than with the cost of the ticket they sold. It's nice to see the court ignoring an argument that has the benefit of being logical, but the basic premise of which is so biased.
While this may cause airlines to increase their ticket prices somewhat, this is because the ticket now more closely represents a guarantee of travel, rather than probability of travel. To the extent that these airlines usually run on time and provide the service they ought to, this new law should affect them very little.
The problem with flights is that they're time-critical, and if you've gone all the way to the airport to catch one, and you're turned away at the gate, the inconvenience caused to you is often far more significant that the mere cost of the ticket. To force airlines to take this into consideration when managing their business practices is a good thing.
Another aspect is that airlines are much less likely to bump a passenger in business or first class than they are an economy passenger. I agree with the principle that these higher classes of travel are entitled to better levels of service and a more comfortable travelling experience, but I don't agree that there is any justification to creating a likelihood that economy passengers might not be able to travel at the time they selected, despite the fact that they have paid for a ticket and planned their trip/meetings/holiday around the flight times.
In effect though, the change is merely an adjustment to the pricing and yield management equations used by the airlines. It's a simple mathematical problem whereby you set the price and the number of seats sold based on the probability of each ticket-holder showing up and the cost of turning someone away.
The cost of turning someone away at the moment is reputational, but monetarily it's zero - passengers have no right to redress in the case of being forbidden to board - this is due to a long clause on the ticket which states that the airline has the right to deny you boarding in the case of overbooking, and that they can offer you alternative travel within their means (i.e. if the next plane is tomorrow, that's just too bad, and they don't have to offer you lodging).
Since right now the low-cost airlines have little incentive to avoid turning passengers away, they are likely to be encouraging it by selling significantly more tickets than there is room on the plane - they get the revenue and have no reason to care if there's insufficient space for everyone. This new ruling changes that by putting a substantial penalty on screwing with your passengers in this way. The airlines will simply recalculate, and while they will undoubtedly continue overbooking because it makes economic sense, the probability that any individual will be turned away will drop dramatically, because they're going to try to avoid it more often.
Posted by nlvp at January 11, 2006 04:22 PM