CHAMPAIGN, Ill. – Thirty years ago, U.S. airlines stopped arbitrarily grounding passengers on overbooked flights, instead offering rewards if travelers give up seats to make room for hurried fliers who need to touch down on time.
Economist James Heins says the seemingly subtle switch has provided a $100 billion jolt to the U.S. economy over the last three decades – allowing airlines to run fuller, more profitable flights that in turn has trimmed air fares and increased tax revenue.
Now, he hopes the milestone anniversary finally yields much-due credit for the late Julian Simon, a fellow economist well known for slaying gloom-and-doom population growth forecasts but overlooked for the seminal contribution to aviation he developed as a professor at the University of Illinois.
“People know about the system, but they don’t know where it came from,” said Heins, who worked with Simon for more than a decade at the U. of I. “I think they should. There are a lot of important research breakthroughs on campuses, but few generate $100 billion in savings to the American economy.”
Now retired, Heins recalls when his longtime friend first dreamed up the overbooking plan in the late 1960s – an offshoot of his free-market research that sought auction-based solutions to improve efficiency and fix social problems.
At the time, airlines arbitrarily bumped passengers when flights were overbooked, creating ill will among travelers left behind. As a result, airlines kept overbooking to a minimum, meaning flights ran far short of capacity when no-shows exceeded expectations.
Simon proposed seeking volunteers instead, offering rewards such as free airfare for a future trip if passengers agreed to wait for a later flight. He maintained that the incentive would free enough seats for travelers with a deadline, and also eliminate any negative public relations consequences.
Heins says Simon’s idea has netted sweeping benefits for airlines, travelers, air quality and the overall economy.
Airlines can now overbook flights at higher rates, he said, which has reduced empty seats and increased profits. Those earnings gains have lowered ticket prices and even heightened safety because airlines have more money to pour into maintenance, he said.
“It’s just a marvelous system because airlines don’t have to worry so much about overbooking,” Heins said. “They know people will volunteer to get bumped because they value what they get more than they value the flight they booked.”
Still, he says it took more than a decade to sell the idea, which finally clicked in 1979 when Simon made a pitch to Alfred Kahn, who oversaw deregulation of the airline industry under President Jimmy Carter.
“I was shocked along with everyone else when Julian actually sold it,” Heins said. “Even good ideas are often a tough sell with government, probably for reasons of inertia. It’s just easier to do things the way they’ve always been done.”
Simon, a University of Maryland economics professor and senior fellow at the Cato Institute after leaving Illinois, died in 1998 at age 65. Ultimately, he gave away the idea and never profited from it, Heins said.
Simon also received little public recognition for his contribution to the airline industry, perhaps because of his high-profile achievements elsewhere, said J. Fred Giertz, who worked with Simon and is now the interim head of the U. of I. economics department.
“I view the overbooking system as kind of an interesting tidbit from his career,” said Giertz, a member of the U. of I. Institute of Government and Public Affairs. “If I had to judge his contributions, it would be more in the area of population growth.”
Simon earned a reputation as a “doom slayer,” attacking claims by environmentalists that population growth would ultimately drain natural resources and leave the world poorer, both ecologically and economically. Simon countered that more people yields more innovation and a richer society.
While he was at Illinos, his work sparked a famous wager in 1980 with Paul Ehrlich, an environmentalist who wrote a well-known book on the hazards of population growth and had criticized Simon’s claim that population is the solution to resource scarcities because people innovate, creating new alternatives.
Simon won the bet when five metals Ehrlich thought would rise in price as a result of increasing depletion actually cost less a decade later. Soon after, though, Heins said it was Ehrlich not Simon who received a prestigious “genius” award from the MacArthur Foundation.
“That’s just the way life was for him,” Heins said. “He found it tough to get credibility. But he was never bitter, never angry. He just went ahead and did his work.”
Now, Heins hopes the anniversary of Simon’s overbooking idea spawns some of the public recognition he deserves.
“I would love it if everyone who benefited on either side of the coin would holler ‘Thank you, Julian Simon’ – the ones who don’t get bumped when they really need to get somewhere or the ones who get a payment that makes it worth getting bumped,” he said.