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A (very) brief explanation of ticket prices

I’m going to stray a little bit from my typical career advice, and I’m going to discuss a few of the airline business practices that tend to drive everyone crazy. One of those is the issue of ticket prices.

As most of you know, airline ticket prices can vary wildly even on the same flight. It’s very possible to have two passengers sitting next to each other who paid a difference of hundreds of dollars for their tickets. What gives?

512px-NWA_Airline_Ticket_JL2703First of all, it helps if you think of an airplane as a venue for a concert or a baseball game. When you buy tickets to a game, you expect to pay more for a better seat, such as one behind home plate or along one of the baselines. You expect to pay less to sit in the “nosebleed” section.

Flights are similar. First class, business class, and seats with extra legroom demand a higher fare because of the benefits or added comfort of sitting in those seats. That’s simple enough. But what drives the rest of the pricing differences?

American Airlines, under Robert Crandall, perfected the use of modern pricing algorithms (it’s actually a trick he learned working for, of all places, Hallmark). With today’s computerized reservations systems, airlines use sophisticated computer models to adjust the pricing of every seat as soon as a seat is sold. This is one reason why it costs less to buy a seat well in advance of the flight.

The airline already knows what the basic cost of a flight will be, and therefore how much it needs to sell each seat to make money on that flight, which allows it to set the basic fare.

Next, it needs to collect all of the various fees and taxes that might be required—landing fees, passenger facility charges, security fees, et cetera. These can easily add more than $100 to the price of a ticket.

As soon as seats begin to sell, prices begin to change. (In fact, if you use the same computer to check the prices of a flight several times, the website can [and often will] use the cookie it has placed on your computer to gauge your interest and raise the fare.) Prices also change as the date of the flight gets closer.

Because airlines get most of their revenue from business travelers, the prices go up quite dramatically within 14 to 21 days of a flight, since this is when business travelers buy most of their tickets. This is similar to the concert or ball game analogy: Supply has diminished, and demand often rises. The airline is, in effect, scalping its own seats, and it is doing so to its best customers, because roughly 5% of the passengers provide almost 95% of the revenue.

Something else is at play as well. The airline doesn’t collect nearly the revenue from leisure travelers as it does from business travelers on a per-seat basis. So, if the mix gets slightly out of whack, ticket prices will move, especially if the “out of whack” portion of the equation means that more leisure travelers are buying tickets than usual. In addition, if passengers are using frequent flyer miles to buy the seat, either prices will increase or the number of seats available for redeeming miles will decrease or even disappear (think of Hawaii).

Just like a concert or a ball game, there can be a last-minute deal, and it can be great one for the consumer. The Yankees may sell a few tickets in the second or even third inning, but an airline can never sell a seat on a given flight once that flight has left the gate, and even the Yankees won’t sell tickets after the fourth inning or so. Therefore, sometimes they will offer steep discounts just to fill the seat at the last minute.

Ticket prices are maddening at times, but there really is a method to the madness, and a madness to the method. Or something like that!—Chip Wright

1 Comment

  1. I knew some of that but as a software engineer I should have realized they might be using cookies to track my interest in flights. I think I’ll be turning on private browsing the next time I start researching tickets prices!

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