Understanding Airline Pricing

February 28, 2012

Airline pricing is an oft discussed and little understood thing. The goal of airline pricing is, for most, to drive the maximum yield for any given seat based on current market conditions. This of course is a highly complex process that necessitates down to the wire inventory knowledge, demand forecasts and hutzpah on the part of revenue managers across the industry. It’s a real shame that this dedication and focus to driving a notional percentage point increase in yield here and there does nothing to drive customer loyalty and can only incentivize the majority of travelers to purchase the cheapest competitive fare.

A friend of mine who is an engineer, working in an industry that on a day to day basis lives and dies by the yield they make from their component sales, had spent a couple of weeks researching flight prices for a family trip to Europe. He was exasperated. He could not decipher the ‘crazy’ pricing schemes he was seeing. All the airlines consistently priced the same, regardless of comparative brand offerings, no matter what range of days he looked at. For the life of him he could not understand how the cost component of the price was expressed to the consumer.

  • Why does BA price the same as United; the service on BA is better, so that must be a premium?
  • Flights for an airline on a 757 which are a squeeze for international are priced the same as their 767 and 777 products?
  • I understand it’s cheaper if I stay a Saturday night, but as I am flying on weekdays, why should that matter?

I think we all have had similar discussions with non industry people and faced a similar barrage of questions. The focus is always the same: what’s the secret sauce and how do I get the right product for the right price?

As I am prone to, I made a mistake here and started to explain how airlines, for the most part, controlled prices based on a number of factors…

Uh-oh.

“Oh really, what factors?” he said. Oh dear.

Err, point of sale, you know, this expresses who is shopping for the booking. Oh, so the airline knows who I am when I shop? No, the airline treats the site you are shopping at as the differentiator. This was set up when there used to be travel agencies, so a better performing agency may get better prices. There used to be thousands of these, but now there are only really 5-6 main ones: the online agencies, mega brick and mortar agencies and airline.com. So that’s no differentiation at all.

Well, then there is variability by relative demand. This peaked some interest. Yes airlines monitor what prices are selling and bubble inventory dynamically to the prices that are selling at a higher yield. So therefore if an airline is selling more of a higher fare they will preference said fare! That’s great, but how come all the fares look the same? Are all the airlines selling at the same relative pace, regardless of how many seats they have available for sale? Well no. OK, try this one.

Airlines also price by how far out you’re travelling and based on how many seats are left. So the earlier I buy, the better the deal I get? No, the earlier you buy, the worse the deal you get. In practice the best fares can be sold really close to departure. So you’re saying that when inventory risk is at its highest you sell at the highest price, and when you have covered the majority of your costs, and are down to the last couple of items you then lower prices? Err, yes. That makes no sense.

Having totally confused and upset my friend, I was asked the million dollar question: how do I get the best value fares? Having just explained the entire pricing process I was stumped.

My friend’s closing words on the matter: how does the airline industry ever plan on making money again?  Their pricing is insane. If I can’t understand how something is priced, how can I assign a relative value to it to make a purchase decision?  And that’s just the seat… what about other products and services?

Ahem...airlines call them ancillaries... Just keep shopping...

Gianni Cataldo

GM Americas, Datalex