Three charts that show why airlines overbook flights

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It all started with a crowded flight in Chicago, but the ensuing controversy may have many asking why airlines overbook their flights, risking the ire of their customers.

On Monday, a video began circulating of a passenger being forcibly removed from an overbooked United Express flight operated by Republic Airways. The reaction was a storm of criticism that has now shaved as much as 4 percent from United Continental shares Tuesday.

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There are good reasons for the industry practice, and as the following charts from the Bespoke Investment Group show, it's likely to continue.

Overbooking flights is fairly standard in the airline industry and completely legal. Airlines often engage in this practice to make up for customers who do not show up for their scheduled flight, trying to ensure that their flights are as close to full capacity as possible.

As shown in the chart above, the percentage of seats filled — or the load factor — for domestic flights has remained fairly flat at 85 percent in recent years, Bespoke said. This means that most planes within the U.S. fly close to their full capacity.

This strong demand has helped to boost airline ticket prices — especially compared with other consumer goods, as depicted above.

The chart shows that airlines had struggled for three decades as increased competition and deregulation weakened airline fares. However, post- 9/11, the dynamics began to shift and ticket prices rose faster than the rate of inflation as demand for the seats increased and the industry was reorganized.

The primary reason for this phenomena is the reduction in capital expenditures by the airline industry, Bespoke said. Airlines simply do not want to spend money on new equipment to then only have flights that are half full. The companies would rather wait to add to their fleets until they are sure that there is enough demand to fill the seats.

"In other words: crowded flights and occasional conflict over seats is likely here to stay. Bad for travelers, but good for the airlines," Bespoke said in a note on Tuesday.

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