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 Chamberlin, November 17 2020
How airlines set airfares: why one flight costs more than another

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 Chamberlin

Chris Chamberlin is the Associate Editor of Executive Traveller, and lives by the motto that a journey of a thousand miles begins not just with a single step, but also a strong latte, a theatre ticket, and later in the day, a good gin and tonic.

05 Feb 2020

Total posts 26

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. 

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.

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.

Hi Guest, join in the discussion on How airlines set airfares: why one flight costs more than another