How airlines set airfares: why one flight costs more than another
Airfares are forever changing, but what makes prices dial up or come down? Welcome to the dark art of revenue management.
By Chris C., November 17 2020
Airfares seldom stay the same every time you fly – some days, you’ll land a rock-bottom deal worth bragging about, while a week later, a similar flight could burn a much larger hole in your hip pocket.
Welcome to the dark art of airline ‘revenue management’: the business of squeezing every possible dollar and cent out of every departure, even if that means taking off with fewer, higher-paying passengers, rather than a full load of savvy sale shoppers.
Speaking at this month’s CAPA Live event from Chicago, Dave Bartels – United Airlines’ Vice President Pricing & Revenue Management – gives a rare insight into how airfares are controlled, and why one flight can cost so much more, or considerably less, than another.
Airfare pricing: behind the scenes
At United, the business of planning flights and setting airfares is balanced across three distinct teams.
Before any flight goes on sale, the ‘pricing’ department creates and programs every possible airfare that might ever be sold on any given flight, across all cabins on board.
Some of the factors influencing price can be obvious – such as the higher cost of flexible tickets versus the likes of ‘basic economy’ – but other aspects come into play too, such as whether a booking is made last-minute, somewhat earlier, or during an advertised sale.
“What they're trying to do is hit the optimal price point for a given market and a given advanced purchase,” Bartels explains.
With fares in the system, the ‘scheduling’ team decides how many flights will run each day or week, considering not only demand, but other factors like the availability of aircraft and crew, and the value of flying an aircraft more regularly on one route rather than another.
Then, it’s up to ‘revenue management’ to determine “the right price that maximises revenue for a given market in a given time window.”
Revenue management works around supply and demand
Explained simply, when flights are selling like hotcakes, the price generally goes up to keep seats available for those who really want them – not unlike surge pricing on Uber – and when passenger numbers are lower than expected, it’s time for a sale.
It's all about “rebalancing supply and demand”, says Bartels, and that balancing act isn’t achieved by guesswork: history plays a big part, with years of sales patterns to draw on.
“For example, the second Wednesday of November is typically going to behave like a past second Wednesday. It's going to behave like a Wednesday, and particularly, like past second Wednesdays in November,” Bartels highlights.
“We're able to mine that history and model the remaining demand for any given market at any given time channel – and so, we detect that, compare it against the remaining seats, and then make a decision on whether we need to adjust price.”
This could include manually withdrawing some of the airline’s lower-cost fares from sale on certain flights.
“When demand is an excess of supply, you're in a situation where if you don't do anything, you're going to run out of seats – and so what you need to do is adjust price upward to rebalance supply and demand for that particular flight.”
Alternatively, the airline could follow the roadmap laid out by the pricing team, which sees fare prices changing on their own as tickets are sold, and as time passes.
For instance, some fares have selling limits applied behind the scenes: and once that limit is reached, the lowest available fare automatically becomes more expensive, and so on.
As well, as a flight gets closer to departure, some fare prices may automatically disappear.
Wouldn’t you just plan more flights, when demand is high?
While it might seem logical to put on more flights when more people are hoping to travel, having too many seats available means filling up jets with lower-paying passengers.
For an airline, that can be less profitable than running fewer flights, on which the average passenger pays more.
When asked why the number of return flights on some US domestic routes can change every day of the week, Bartels explains that on each city pair, United has historic sales data “around the amount of demand in different seasons, and different days of the week.”
“Then, there's obviously competing uses for the aircraft in certain seasons,” highlighting that while the airline may be able to fill a jet on a certain route, flying that plane elsewhere could generate more revenue in the same amount of time.
Why is one route usually more expensive than another?
As fare prices are set by route, travellers may notice that tickets to one destination may always be more expensive – or indeed, lower-priced – than fares to another.
That’s true even if the flights compared are roughly the same length, have a similar departure time, and use the same type of aircraft.
“The type of customers who fly in a certain market may drive a different kind of optimal price, or a different revenue maximising price, versus another market,” Bartels says, “even if flights are similar … like a similar distance, or similar elapsed time.”
For example, one city pair might be heavily dominated by business travellers, while another might be more leisure-focused, or have a broader mix of the two.
And then came COVID-19...
The impact coronavirus is having on the travel industry is proving particularly tricky for airline revenue management teams, who can’t use much of their historical data to estimate demand and make those calculations.
“We talked about the second Wednesday of November. This second Wednesday, November of 2020, is not going to be anything like any other second Wednesday of November that we've ever had, right?” Bartels poses.
“So the systems, if they were to run on their own, wouldn't have any decent data to work off of – it's not like you can tell it, ‘hey, we're going to be down 50% on all flights, so just adjust your demand down 50% and it'll work out’: it's much more uneven than that.”
Instead, the calculations become more manually driven, across everything from scheduling flights to setting fares.
“We have analysts that have been studying this, and looking at which markets are stronger than others, and which markets will support more demand than others.”
Once those numbers have been bedded down, it’s back to the pricing team to set airfares, and the fare cycle starts its journey once again.
Also read: Airlines axe ticket change fees to lure back flyers
Chris is a a former contributor to Executive Traveller.
05 Feb 2020
Total posts 31
Three departments to set airfares sounds very old school. No wonder they are constantly manipulating prices, to cover the cost of 3 departments and squeeze the consumer.
There is computer software that does all of those things and compares flight prices on other airlines as well in real time.
Despite all that, as a frequent flyer being held ransom by airlines with constantly changing ticket prices I do wonder why industry watch dogs allow this to happen.
13 May 2020
Total posts 827
industry watch dogs allow what to happen ?
It same in most industries, you want to get the highest price for a widget that the market will bear, then you have price reduction sales.
05 Feb 2020
Total posts 31
Actually, most widgets and manufacturers have a recommended retail price as a guideline for pricing. They dont bounce their prices every five minutes like airlines do to nickel and dime customers. Airfares and car fuel prices are a real standout for fluctuating prices and its mercenary.
13 May 2020
Total posts 827
brett 132 you don't seem to understand there are always dozen or more prices for the same flight. Generally the cheapest sell out 1st. When yield managers don't get it right, they have a sale.
Retail pricing has changed over last few decades.
eg. was heavily involved in retail for 30+ years.
Say an item was $100 wholesale & therefore $200 retail back 20 years ago. Then after a period to clear out stock of that item, shop would have 20-25% off sale.
The dumb public now thinks 20 to 25% off is not much, so the retailer starts of retailing at $300, not $200 & sell some to those who don't care about price, then has a 50% sale (retail $150) or more off & ends up in the same or better boat.
Some things these days start of at crazy prices & very quickly are on supposed sale. It's simply that many consumers look at % off. % off what ?
05 Feb 2020
Total posts 31
I just love it when people tell you "you just dont understand", condescending to say the least. My experiences with flight ticket pricing has found it to be very fluid and people are taken advantage of during holiday and peak times. Then the airlines are watching each other so that they can raise or lower prices in accordance with what others are doing. The list goes on, so really its a matter of how much you can skim and when you can skim it hardest. I find this manipulative and if it were based on real time cost increases etc I would feel better about it, but moreso its about taking advantage of customers. Im sure you will have another derogatory response regular flyer so I will leave you to it.
13 May 2020
Total posts 827
I work in yield management. That's how get paid & have been doing it for more than 40 years.
say there's a dozen fare buckets for a flight.
If you book it 11 months out, as many do to get the best airfares esp internationally, you normally get the best fare even if in peak school holiday period.
AFAIK Airlines that use GDS's have to pay more to have more fare buckets, so they use the fare buckets they have. In peak periods, there maybe more in the higher fare buckets & less in lower fare buckets.
World events can upset the apple cart, like SEP11, GFC, corona etc.
When this happens, the fare buckets might change.
The perfect scenario is a flight is 99% full few days out & business types who don't care what they pay, take the last few seats at highest fare bucket.
Jetstar seem to manage their yields better than Qantas. Qantas keeps more top fare bucket seats, as they have more business travellers obviously.
13 May 2020
Total posts 827
most of above is simply economics 101.
However, computers cannot do it as proven at start of corona, when they kept lowering fares when seats did not sell.
Think I saw mentioned NYC/LONDON got as low as US$100 one way, before a human took control.
The really interesting thing is some of the sales fares coming out now & soon.
$122 return BNE/MEL on Jetstar, available for many months next year (designed for 3 reasons, I assume, 1. to stuff up Rex & 2 to lock some people in before the recession really kicks in around middle of next year or bit earlier, 3. to guage the buyhing publics acceptance of corona being over or not)
$89 BNE/SYD one way on Virgin.
$999 retunr BNE, SYD or MEL/LAX in school holidays 2021.
18 Sep 2015
Total posts 140
Interesting article. You could add another two factors to pricing - competition (is there any or is it a monopoly city pair?), and quality of service/aircraft provided on a given city pair, eg. turboprop vs jet, jet with business class or a 'low cost' configuration.
13 May 2020
Total posts 827
what most of the public don't realise - wholesale fares are the cheapest fares usually, but hidden as usually part of a package. Covid changed this.
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