Airlines and hotels routinely accept more bookings than they have seats or rooms. The practice depends on forecasting how many will not turn up, and cancellation terms shape that forecast.
Empty capacity cannot be recovered
A seat that departs empty and a room that goes unoccupied both produce nothing, and neither can be sold afterwards because the date has passed.
Historical data shows a consistent share of bookings that cancel late or simply do not arrive, and that share is stable enough to be forecast.
Selling to that forecast recovers revenue that would otherwise be lost, which is why the practice is standard rather than exceptional across the industry.
Why the forecast is usually right
No-show rates vary predictably by route, by day of the week, by fare type and by how far ahead the booking was made.
Flexible and refundable bookings cancel far more often than restricted ones, so the mix of fare types on a flight tells the system how much to oversell.
Business-heavy routes with late bookings carry higher no-show rates than leisure routes booked months ahead, and the models are tuned accordingly.
What happens when it is wrong
When more passengers arrive than there are seats, carriers first seek volunteers to travel later in exchange for compensation and rebooking.
Where volunteers are insufficient, passengers are denied boarding according to defined criteria, and compensation rules apply in many jurisdictions.
Those rules differ substantially by region and by where the journey begins, and the amounts and conditions change over time, so the applicable terms depend on the itinerary.
How hotels handle the same problem
A hotel that oversells arranges accommodation at a comparable property nearby, usually covering the difference in rate and the cost of getting there.
Guests arriving latest are the most exposed, since the property allocates the rooms it has as arrivals occur through the evening.
Guaranteed and prepaid bookings are generally protected first, along with loyalty members, because those are the guests the property most wants to retain.
What cancellation terms are really pricing
A refundable rate costs more because it transfers uncertainty to the supplier, who may be left with capacity too late to resell it.
A non-refundable rate costs less because the traveller absorbs that uncertainty, and the discount is effectively payment for doing so.
Deadlines are the practical detail that matters, since cancelling a day before a free-cancellation cut-off costs nothing while a day after it can cost the full stay.