Finding those perfect airline ticket prices can be enough to tear your hair out in frustration. So, why are airline ticket prices constantly changing? How do airlines come up with the ticket price that you pay for your flight in the first place?
Understanding the dynamics of purchasing airline tickets and knowing what to look for could benefit you (your pocket book) greatly the next time you book your flight.
Let’s take a peek into the world of airline ticketing and fares. This is a mystery that few flyers fully understand. Additionally, not understanding how you are charged for your airline fare could adversely affect your pocketbook. You should always consider the myriad of factors that affects you when you book your airline ticket.
As a full-time professional “airline-insider” for more than three decades, Captain Jetson Airline News wants to help you understand why you pay what you pay for your airline tickets. This information explains the process in general. However, there are varieties in how each airline operates, which can even be based on the individual air carrier’s proprietary and confidential software.
Airlines use a fare forecasting software to determine your ticket cost
Quoting your fare revolves around dynamic pricing. Quotes can go up and down like a yo-yo! Airlines’ computer software monitors how sales for every flight is progressing by constantly predicting where to set the price next.
The computers consist of an advanced system of an algorithm designed to help you make your decision (and the airlines’ revenue) whether you should buy your ticket now or at a later time.
Airline passenger ticket purchasing behavior
To achieve a balance in dynamic pricing the airline must first understand who the customer is. Airlines must track flyer purchasing behavior carefully.
Airline customers are generally divided into two different categories
The two different flyer-types targeted are:
Category 1: Leisure flyers
Leisure travel flyers are price sensitive. They typically book flights as far as months ahead of their flight. By recognizing this behavior the airline understands the need to sell tickets to leisure travelers early and at an attractive price.
Category 2: Business flyers
Business flyers demand flexibility. This type of flyer usually books their fare only a few days before the flight. The business passenger just doesn’t care as much about the ticket cost.
In order to successfully capture the business segment of passengers, the airline increases the ticket prices as the flight date is getting closer.
Fares stay the same for months before departure. The price begins to go up in multiple steps as the departure date approaches.
What fares are based on
The fares are based on advanced purchase discount requirements.
For example: Are there still unsold seats available after the advanced purchase requirements, such as a limited time offer, have passed?
Let’s say that you still haven’t purchased your ticket by the minimum two weeks in advance required time-limit conditions for a ticket.
When less than two weeks remain before that flight the price will go up.
Then, if you still haven’t purchased that ticket with only one more week to go before your flight, the price will go up even further!
Ticket pricing strategy applies to all classes of seats
An airline’s pricing strategy generally applies to all seats on an airplane, whether you fly Economy, Business, or First.
Typically, airlines will apply multiple fare increases for every day your flight approaches its departure time.
This pricing strategy enables the airline to balance the entire plan of action for selling enough tickets to make a flight a good revenue flight.
So many elements need to come together on behalf of the airline:
The number of seats for leisure flyers, business flyers, the timing of the ticket sales versus prices offered, load factors, ancillary revenue, and tons of other factors.
Why do airline ticket prices constantly change (Dynamic Pricing)?
Major airlines typically change an average of about half a million ticket prices on a daily basis!
Airplane service classes
Each airline and airplane is different. The class-name, such as Business Class, may have different names, such as “Premium Class” at Norwegian Air, for instance. Generally, all airplanes are divided into different classes of service, with a pricing structure designed accordingly.
Sample section service class pricing for a flight
Let’s look at a typical class pricing structure for one flight:
- Basic Economy: $230.
- Main Economy Cabin: $380.
- Premium Economy: $1,150.
- Business Class: $2,880.
- First Class: $3,940.
Each and every one of these seat-prices can increase and decrease several times over a few days.
Why do airline ticket prices fluctuate?
The airline continually tries to sell as many seats as possible at the maximum price they can get. A lot of different considerations go into how the airline algorithm software figures what that price should be. There is a balancing act and a strategy in place to try to fill every seat from every class on your airplane (see above).
A balancing act of seat-types to achieve profit
To have an airliner taking off near empty but with only the most expensive tickets sold is inefficient. It is also inefficient to have all the lowest-priced seats occupied but low sales of other seats.
Airline revenue managers have to tackle a balancing act between coming up with the highest price they can get away with. The most they charge for a first-class ticket, as well as the basic economy class ticket, must be carefully considered. In that way, the airline can offer something of value to every flyer, from the business flyer all the way down to the budget flyer, who is willing to pay less.
Flyer purchasing behavior
How airlines come up with fares (video)
What is dynamic pricing?
Dynamic pricing is a pricing strategy of adding peaks and valleys to ticket sales. The system allows for prices to change dynamically, regardless of the discount purchase time-limit requirements previously announced to customers.
How does dynamic pricing work in practice?
Let’s say there are 60 economy class seats on the airplane. The group of 60 seats is divided into sub-groups, called “fare-buckets”, or multiple fares- groups.
Fare-buckets (a limited number of seats at one price)
First, each fare-bucket is pre-assigned a given number of seats to be sold at a pre-set lowest price.
In this example 8 of the seats belonging to this fare-bucket will be sold at the absolute lowest price, perhaps with the lowest bag allowance and most restrictions. Once those 8 seats have been sold, that fare-bucket closes, and that price is no longer available for purchase.
The other two fare-buckets in the 60 seat group of economy seats could be 1) 22 seats being sold at a slightly higher price than the lowest 8 seats, and 2) The remaining 30 seats could be sold at the highest price of the economy class cabin.
Next, the airline monitors demand
With pre-set fares based on the best estimation of fare-buckets the airline monitors demand on these seats.
If the higher-priced buckets are slow to sell your airline may re-open the lower bucket again, in order to satisfy price-sensitive customers!
If the seats are filling up too fast the airline may prematurely close the lower-priced buckets to attempt to sell out the flight at the higher prices.
Reacting to sales demand
Advanced fare discounts and fare-bucket motion are the two driving forces behind dynamic pricing, continuously monitoring demand versus action.
Further factors affecting dynamic pricing
External factors can also affect ticket pricing. factors affecting how much you pay for your ticket also include
- The volatile cost of fuel.
- Seasonal factors. For example, flying during the holidays when demand is big means you are going to pay more for your ticket. However, flying on a holiday, such as Christmas Day, means low demand and low ticket prices.
- Interval increase in demand. Is a major sports event happening where you are flying? Again, your flight will be in great demand. Again, prices go up during that time.
- Competition. If a competing airline sells the flight for a lower price than what you can buy it for at your airline, then your airline will most likely match the fare of the competitor.
How airlines monitor demand
Observing the psychology of the buyer enables airlines to monitor demand for their products. Airlines monitor things like your time of purchase, demand activity, and much more. In other words, sophisticated computer software is “spying” on you, monitoring everything you do on their site!
You may check the fare from A to B on XYZ Airline now. 30 minutes later you go on the airline’s website to find that same ticket now sells for $100 more!
The airline’s computer knows you visited them 30 minutes ago, but then you left their site. 30 minutes later you log back on. Since the airline’s computer knows you already checked the flight:
The computer cookie you left during your initial fare check now tells the airline to try to jack up the price for that same flight to see if you “bite” on the actual purchase offer this time.
After all, since you came back, you must still be interested, right?
This too is a part of the Dynamic Pricing setup. But, don’t fall for that trap…
However, you can actually “beat the system” when it comes to this part of dynamic pricing
Clear your cookies before your next search. In that way, you can effectively “trick” the airline’s computer into believing your second visit is your first visit!
New airline ticket pricing strategies: NDC
The methods that airlines use when pricing tickets are becoming more sophisticated all the time.
In 2012 airlines began operating with a new data exchange strategy, called the NDC (New Distribution Capability). The program has been designed to tweak even more personal data out of a customer’s purchase behavior. The goal of the strategy is to be able to offer a personalized approach satisfying your needs under which conditions you’d purchase an airline ticket from an airline.
What do you think about how airline ticket prices are constantly changing, going up and down like a yo-yo? How about your opinion on airline dynamic pricing? Did this article help you better understand airline ticket pricing? We’d love to hear feedback on this from you. We could even quote your opinion in a future article on Captain Jetson (with your permission, of course). So, please send us your comments now!
Featured Image: An airliner in flight. Unsplash.