How Airlines Price Flights - YouTube

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Airline ticket pricing probably seems like a crapshoot.

The numbers change seemingly arbitrarily every week, day, or hour, but there’s some real

science behind these prices.

People spend their whole lives figuring out what to charge you to fly.

Let’s take a look at one flight on one route by one airline to understand.

American Flight 33 leaves New York’s JFK airport every day at 7 AM bound for Los Angeles

arriving at 10:51 AM pacific time.

This transcontinental route is one of the most competitive in the world with over 3.5

million yearly passengers and five major airlines connecting the country’s two largest cities.

There’s nowhere where pricing strategies are more important for airlines than here.

Looking at three months of fares for this flight, there are eight distinct prices for

economy ranging from $129 to $472.

These all get you on the exact same flight in the exact same seat but each and every

price has a purpose and place.

The lowest price, $129, is the most competitive price.

This fare only shows up three times in our three month span—each time on Tuesdays.

Now, Tuesdays are very often the cheapest days of the week to fly.

Business travelers tend to make up much of the demand during the week and they most often

want to fly out on Monday and return on Thursday or Friday so Mondays, Thursdays, and Fridays

tend to be the most expensive travel days while Tuesdays and Wednesdays are often the

cheapest.

The average ticket price for this flight shows this—Tuesdays average $182 and Wednesdays

$173.

Even if the demand is lower American Airlines runs the flight anyways and they have to fill

seats to break even so they sell the flight at rock-bottom prices.

The next price, $144, actually demonstrates a very interesting phenomenon.

Whenever American prices their flight at $144, they are not alone.

Take March 6th for example.

American, Delta, Virgin America, JetBlue, and United all have flights from New York

to LA at around 7 in the morning selling for $144.

They’re doing what is called price matching.

Because this is one of the most competitive routes in the world and because the number

one determinant for travelers on which airline they take is price, all five airlines flying

this route match each others prices.

This way, travelers make their decision based off the reputation of each airline rather

than the price.

The price stays at $144 because it’s in each airlines best interest to keep it there.

In a normal market, if Delta, for example, dropped their price to $119 they would get

more travelers since they were the cheapest, but in this price matched market all the other

airlines would drop their prices as soon as Delta drops theirs so all of them would get

the same amount of travelers as before while earning less money, but there are some cases

where it can make business sense for airlines to drop prices to below even being profitable.

Around the year 2000, WestJet and the now defunct CanJet airlines started flying from

central Canada to Newfoundland.

These routes were historically operated exclusively by Air Canada and they were expensive.

A one-way flight from Montreal in 1999 cost over $600, but when the budget airlines WestJet

and CanJet started flying the route, prices dropped dramatically and Air Canada was threatened,

so they dropped their prices even lower.

The $600 Air Canada fares then cost $89.

Now, it wouldn’t make sense for anyone to fly a budget airline over Air Canada at the

same price so WestJet and CanJet were almost driven out of business on these routes, until

Canada’s Competition Bureau stepped in.

They concluded that Air Canada was engaging in the uncompetitive action of predatory pricing

since they were pricing flights below what it cost to operate them, so they were forced

to stop.

Airlines in the US, with some newly strong budget competitors, are engaging in similar

actions nowadays.

United airlines, for example, is matching Frontier’s $40 fares on many days from Denver

to Chicago, among other routes, in order to maintain their market stronghold in Denver

and Chicago even though their cost to operate the route is drastically higher than Frontier

so they are almost certainly loosing money on those fares.

But back to the New York to LA route. $159 is the lowest regular fare for this flight.

The $129 and $144 price points were both basic economy fares—the most restrictive type

with no seat selection, no carry on bags, and no changes or refunds.

Every flight has a bunch of different booking classes each with a fare code.

For example, the basic economy fare code for the $129 and $144 price is B, but the $159

price books into fare code N. These different booking classes are sometimes known are fare

buckets.

Essentially the airline decides it’s going to sell a certain number of tickets at the

$159 price with fare code N, let’s say 10, then when those ten tickets are sold the airline

then sells economy at fare code G for $204 then when those are sold it sells economy

at fare code V for $269 then fare code L for $318 and so on and so forth.

There are also some cases where a ticket will default to a more expensive fare bucket because

of reasons other than the lower fare selling out.

Many fares, including each mentioned so far, have advance purchase requirements meaning

that, even if a flight is not full at all, the price will increase closer to departure.

All the fares below $204 have an advance purchase requirement of two weeks meaning that you

can only purchase them more than two weeks before departure while the $269 fare, for

example, has an advance purchase requirement of only one week.

Although, the cheapest fare without an advance purchase requirement at all, that is, the

cheapest fare that you could buy day-of for this flight is fare class K at $472 which

happens to be the most expensive economy class fare.

And now for some caveats.

Not every fare for this flight is going to be priced at one of these eight prices.

Airlines have mechanisms to adjust fares from these buckets.

In the short-term, they can adjust things like the fuel surcharge to raise the price

if other factors, like oil prices, increase.

In the long term they can adjust the actual prices of the different fare buckets.

Airline often increase the base fares for busy seasons like summer.

American Airlines does exactly that on this New York to LA route where their fare class

M, for example, increases from $357 to $410 in August.

But so far we’ve looked at this at a micro level—how prices differ on one flight—but

we also have to consider the macro level.

Why if you leave on Tuesday February 6th and fly 2,469 miles to the west to LA do you pay

$129 while if you fly 3,442 miles to the east to London—only a thousand miles further

than LA—you pay $2,772.

Well, the second figure is a bit deceptive because that’s the price of a one-way ticket.

If you switch the LA flight to a round-trip ticket returning a week later it will cost

$257—exactly double—while if you turn the London flight into a round-trip returning

a week later the price will drop to $602—almost five times less.

This is understandably confusing—a one-way ticket that costs more than a roundtrip—but

the reason this is goes back to the fare codes.

Embedded within each fare code are a bunch of little restrictions that dictate when you

can use that fare.

On the New York to LA trip those restrictions are just things like blackout dates for the

fare and advance purchase requirements, but the New York to London ticket has loads more

restrictions and the ones that make one-ways more expensive than round-trips are the minimum

stay requirements.

These requirements dictate how soon your return flight can be in order to get a particular

fare.

The idea is to price discriminate—business travelers should pay more because they can

pay more.

Meanwhile, airlines try to give the lowest prices to leisure travelers since they’re

the ones paying for their own tickets and therefore they’re the ones that are the

most price sensitive.

Business travelers often want to be home for the weekend, so many of these minimum stay

requirements, like with fares Q, N, and S, just require a Sunday at your destination.

Others, trying to accomplish the same thing, require seven days, a full week, which would

also require a traveller to stay the weekend at their destination.

Now as the prices go up the requirements go down so once you get to paying around $2000

you can stay for as few as three days, but the cheapest roundtrip base airfare with no

stay requirement at all is $5,544 in fare class Y—exactly double the one way price.

So that explains this—the one way ticket is so expensive because, since the airline

doesn’t know how long the traveller will stay at their destination the one-way fare

has to be booked into the least restrictive fare class without the minimum stay requirement.

You’ll see this idea of price discrimination all over ticketing structures.

It’s a genius pricing concept that allows different people to buy products at the prices

they can afford and therefore its allows businesses to sell the same product to more people.

Tickets increase in price closer to departure because leisure travelers buy tickets far-out

and business travelers buy their tickets close to departure and flexible tickets are more

expensive because that’s what business travelers need, but there’s another pricing difference

going on that’s less fair—between routes.

It’s all about competition.

Different routes of the same distance cost different amounts generally not because they

cost different amounts to operate, but because of how much the competitors are charging.

This is part of why flights into small airports are so expensive—because they lack competition.

You can fly the 240 miles from Detroit to Pellston, Michigan on a CRJ 200 for $242 or

you can fly the 170 miles from Detroit to South Bend, Indiana on a CRJ 200 for $76.

The only difference is that South Bend Airport has flights from United, Delta, and Allegiant

while Pellston only has flights from Delta.

The same phenomenon happens over the Atlantic.

There’s more competition on the six hour flight from New York to LA than on the six

hour flight from New York to Dublin so you can fly to LA for $250 round trip while Dublin

costs $500 round trip.

Of course, travelers from New York to LA can drive, take the bus, take the train, or take

a flight connecting halfway there while travelers to Dublin only have one choice—to fly.

In all, the truth is that prices reflect what people will pay and so people will pay what

flights are priced.

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