Many of us have tried to find the best strategies for buying airline tickets. Some say Tuesday is the best day to book a trip and experience has shown that the closer to departure day, the higher the fare. Choosing off-peak dates, avoiding holidays, searching for flexible destinations, adding stopovers and more tools can all help you to get the best airfare. But, to really understand ticket pricing, it pays to look at it from the airlines’ point of view. How do carriers determine their fares and what factors to they take into account before charging a particular price? It should come as no surprise that airline ticket pricing is a well-developed and constantly evolving process. It’s driven by a combination of algorithms and strategies developed by revenue management teams and external consultants.Typically, this process is automated and highly efficient, with a few notable exceptions.
Before the 1970s, many countries had some form of regulated ticket pricing. This did not change appreciably in the US until 1978 with the passage of the Airline Deregulation Act. Before its adoption, US regulations defined which routes and air carriers could operate and the fares that could be charged to passengers. The changes which followed “opened up” flying to many more travelers as well as airlines and generally lowered fares, but not without pain and bankruptcies. To give you an idea of pricing before deregulations, some figures were provided by Stephen Breyer in a 2011 Bloomsberg Article. In the piece, he stated: “In 1974, the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today, one can fly that same route for $268.”
The ability to extract as much revenue as possible from each passenger is essential for an airline’s continued profitability. Today, carriers can develop complex algorithms to capture as much revenue as possible from each passenger. Of course, pricing these days is not fixed or controlled, and airlines will seek to maximize profits made through ticket sales. A ticket can be worth different amounts to different people, and pricing is all about determining this value and making the most from it.
When you browse for flights on an airline’s Web site, assorted letters appear in your search results. Travelers often miss them. Or see them, but don’t factor them into their decision about which flight to choose. But, these letters matter. As many frequent fliers know, the visible class distinctions on airplanes (Economy, Premium Economy, Business or First) are further divided into invisible groups called fare classes, or booking codes. Different airlines assign different letters to these classes, which can also vary from carrier to carrier. Pricing and the availability of fares are determined today by a system of fare basis or booking codes. Notably, these letters define the fare level paid. The International Air Transport Association (IATA) first defined these codes in the late 1940s to promote consistency across air carriers and aid the acceptance of tickets between companies. Sadly, however, many airlines today have discontinued their interline agreements.
We all know that prices can vary significantly over the months leading up to a flight. Using historical data, airlines can increasingly predict how to price tickets to maximize sales and revenue. While it may sound like a good idea to lower prices to fill seats in all cabins, it could undermine earlier higher pricing if airlines did this too far in advance. What’s changed in recent years is last-minute pricing, whereby carriers offer upgrades, selling premium cabin seats for much lower rates. There is far less risk of undermining prices in this scenario since the vast majority of lower booking-code passengers have already purchased tickets. Another factor influencing price is the current level of ticket sales. You would expect prices to be much higher when only a few seats are left on a flight. This naturally follows from the basic economic principle of supply and demand. Airlines will make a certain number of seats available in each booking class and, as the lower booking classes sell out, only higher fares remain. Sales volume also has a very short-term effect. Algorithms will constantly look at sales volume and tend to increase prices if there is an uptick in demand. On some routes, though, carriers may keep selling heavily discounted fares on full flights if history shows no-one will pay the higher fares.
One of the pricing trends we’ve seen in recent years is airlines offering lower fare types, but with fewer inclusions. This began with the ultra low cost carriers, but the full service airlines have since followed suit. They will set a low base fare, but exclude extras such as luggage allowance, seat selection and even entitlement to some frequent flyer benefits. All the major US airlines now offer such fares. The so-called legacy carriers have employed this tactic to maintain their competitive edge with budget airlines and improve their appearance in search engines. As increasing numbers of passengers search for fares online, carriers with higher base fares will be punished.
Every airline also uses its algorithms and AI technology to set and change prices. This, of course, requires human oversight, but it's a long way from the days when fares were fixed and adjusted manually. Extensive data analysis is used to support price setting, which has seen significant improvement in recent years. Carriers have always used past sales and booking data to influence ticket prices. Still, now more than ever, they are using this information to create dynamic algorithms to control costs for multiple factors, including market conditions and fuel prices. Increasingly, airlines are using, storing and purchasing data to further improve their algorithms.
In the long term, airlines will continue to perfect strategies to optimize total revenue. Algorithms will steadily advance as will AI and the power of analysis and the data available to enhance ticket pricing.
Until next time…safe travels.
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