Since the core concept of yield management of airline is to sell the right seat to the right type of customer, at the right time and for the right price, overbooking has become the trump for airline to maximize its revenue or profits. In the airline industry, seats are regarded as inventory. If a plane leaves gates with empty seats, this inventory is lost and spoiled. Company will lose revenue without any compensation for losing inventory so that overbooking is a effective strategy to avoid such kind of loss. Because not everyone travels on their booked flight for various reasons, most airlines will overbook their flights, sometimes by as much as 50% with mixed prices to make sure the plane will take off with no empty seats. If overbooking is done correctly, that will be a win-win situation between travelers and airline companies. Customers can get lower fare and airlines can earn more revenue. However, what if overbooking goes wrong?
Using overbooking method requires a very comprehensive and accurate demand forecast. Some exceptional cases might happen that if the actual number of passengers is higher than airline company forecast. Some passengers will be forced to take later flight sometimes have to stay over the night in airport. Airline need to compensate those passenger with any discounts, premiums or accommodation. On the other hand, the airline should try to predict the price of overbooking. A passenger who is denied a seat despite his reservation can happen to be very expensive. In the short run, it is only a ticket revenue loss, but long term implications include passenger loyalty and airline reputation. In a word, the higher level of overbooking, the faster cost increasing and higher risk with less passengers are willing to modify their flight arrangement. Poor overbooking decisions will be very costly.
References:Why and How Airlines Overbook Flights http://www.thetravelinsider.info/airlinemismanagement/allaboutoverbookingflights.htm
Yield Management In The Airline Industry