Wednesday, April 20, 2011

Air Fares 101 – Why do fares change all the time?

Time and time again, people always ask; Why do fares change all the time?

It’s the airlines who set the prices—we just seek out and present the best ones. And as many of you have noticed, airlines change fares often.

Why is that? Why is checking a fare like playing the stock market – up one day, down the next, with seemingly no rhyme or reason? Here’s a little lesson on airfare pricing that will attempt to give you a better understanding of what’s going on behind the scenes as you shop for fares.

The Airline’s Dilemma

The airlines want to be able to have their cake and eat it, too, and they go to great lengths to make that possible. They employ a very high-tech strategy called yield management which intentionally aims to charge different prices to different passengers in order to maximize the total revenue collected for each departing flight.

Here’s what we mean: Let’s say you’re an airline. You have a plane with 100 seats on it that you’re going to fly from Point A to Point B. There will be a group of people — business travelers, travelers with family emergencies, people who just don’t care about the price — that are willing to pay a ton of money for a seat on that plane. We’ll call this the “go-at-any-price” group. Additionally, there will be a much larger group consisting of price conscious individuals who would love to travel but don’t necessarily need to. This second group may be willing to buy a ticket on this flight, but only if the price is affordable. We’ll call this the “go-if-the-price-is-right” group.

The airline’s dilemma is that if they set the price per seat at the maximum price they can get from the “go-at-any-price” group, they would generate a lot of revenue from those passengers but they would be flying planes with a lot of empty seats (a wasted opportunity for even more revenue). On the other hand, if they fill the plane by charging fares low enough to attract all the “go-if-the-price-is-right” travelers, they will be giving seats to the “go-at-any-price” crowd for far less than they would have been willing to pay. The thought of that makes the airlines cringe.

An airline’s goal is to get as much as they possibly can for each seat on the plane. If 10 people are willing to pay $1000, they would love to sell 10 of the 100 seats for that price; if there are another 20 people willing to pay $500, then they’d sell 20 more seats at the $500 rate; and so on until the plane is full.

But how can they do that?

Same Seat, Different Fares

Airlines never just have one fare – they have several, even dozens, of fares for each seat and they employ sophisticated techniques to maximize the number of people who get stuck paying the higher of those fares.

Here’s a real-life example. United Airlines currently publishes 43 different one way economy class fares for flights between Los Angeles and Chicago. These fares start at $109 one way, but there are also fares of $139, $149, $159, $189, etc. all the way up to $1765! The highest fare is more than 16 times more expensive than the lowest fare even though, no matter which price you pay, you’ll end up with the exact same seat, the exact same food (or lack thereof), and the exact same service. (To be the fair, the very highest fares do usually include a few extra, but relatively minimal, perks like being refundable, easier/cheaper to change, first dibs at the best seats on the plane, etc. but nothing that substantially changes what you get for the fare that you pay.)

Knowing that a given seat on a United Airlines flight to Chicago may cost anywhere from $109 to $1765, you would naturally say “I’ll take the $109 option” but, of course, the airlines don’t make it that easy. Their goal is to funnel every would-be traveler into the highest “fare bucket” that they can. They do that, first, by adding restrictions to the lowest fares that limit how many people can take advantage of them. For example, the $109 fare to Chicago requires you to purchase it 21 days in advance and to fly on Tuesdays, Wednesdays, and Saturdays (the least popular travel days, where it’s harder to sell seats at higher fares). Other fares have 14 day advance purchase requirements and, still others, 7 day. Some fares are blacked out around holiday and other peak travel times. Generally speaking, the lower the fare, the more restrictions there will be on it, and the fewer flights that that fare will be offered on.

But just as important is the fact that, even if a fare is offered on a certain flight, the airlines will limit the number of seats available at that fare level. For example, United may say that on a given flight they will only sell up to 10 seats at the $109 fare, 15 seats at the $139 fare, 20 seats at the $149 rate, etc. From a practical standpoint, this is the probably the most important point to understand about airline pricing. As more and more seats are booked on a flight, more and more fare levels will be “closed out” so the end result is that additional passengers will be stuck paying higher fares.

It’s actually even more complicated in practice. Airlines actually have computer programs that are constantly monitoring flights, analyzing booking patterns, and in real-time changing the number of seats available at each fare level. If a flight is booking up faster than expected, an airline may decrease the number of seats available at some of their lowest fare levels, or wipe them all out altogether. If a flight is not selling well, suddenly more seats may appear at fare levels that were previously “sold out”.

Why Fares Change all the Time

This is why fares change all the time. If you see a different fare today than you saw yesterday, the issue is probably not that the airline made a conscious decision to raise or lower their prices — at least not directly. Instead, it’s likely that seats in the lowest fare categories sold out or were closed out. For instance, if there are 3 $109 seats left on our example flight to Chicago and someone grabs them, the lowest fare available will change to $139. If United’s yield management system looks at the flight and says “Wow, bookings are strong”, it may choose to close the $139 level, too. Then the fare will appear to “jump” to $149. But what if two days later 2 families of 4 booked on the flight decide to cancel? The same system might say “Uh-oh, we have way too many empty seats” and decide to open the $109 and $139 fare levels back up. This process happens continuously until hours before departure. Generally, over time fares on a particular flight will get higher and higher as more and more seats gets booked and more and more fare levels get closed. But there are short term blips all the time and, if you look at it hour to hour or day to day, there will be moments when fares temporarily dip before heading back up once new bookings come in. This entire process is extremely dynamic as at any given time there are hundreds of thousands of shoppers looking for flights and making reservations — and each reservation may have repercussions on the fares paid by subsequent travelers on the same flights.

Fare Sales

What about fare sales? Airlines are constantly promoting one sale or another and you may be wondering how fare sales play into all of this. In fact, if you subscribe to our fare alerts, you probably are constantly hearing about a brand new fare sale – often more than one a week.

The real news would be if there were no sales going on. To the airlines, almost everything is a “sale”. Returning to our United Airlines Los Angeles to Chicago example, of those 43 fares, about two thirds of them are considered to be “sale” fares. A “sale” fare really just means that it requires booking or traveling between a specified time period . Some sale fares are really good deals; others are worthwhile only because they provide decent fares on dates or times that previously weren’t eligible for the lowest fares; and still others are just plain meaningless because they are no better than one or more other fares already in the market.

What’s important to remember about sale fares is that, if they are really lower than the other fares in the market, they will be even more limited from an inventory standpoint. So, for example, if United introduces a 3 day sale fare to Chicago for $99, it will almost definitely not be offered on flights where the existing $109 fare has already been sold out. In practical terms, this means that when sales hit the market, they will usually only be obtainable on flights that are pretty wide open.

Confused Yet?

We apologize if you’re more confused than when we started. Air fare pricing will do that to you. The bottom line is this:

- It is not uncommon for fares on a particular flight to change on a daily, sometimes even hourly, basis
- If you see a fare, know that it may not be there the next time you search –it could be higher, it could be lower
- Neither, nor any other on-line travel agency, has the ability to set prices; we aim to do a really good job at sorting through tens of thousands of options to find the best deals, but it is the airlines and their pricing teams who are actually responsible for those deals
- Fares on a particular flight will generally increase as the flight becomes more heavily booked but at certain points, fares may fall dramatically if a fare sale is launched or an airline computer determines that booking levels are below where they should be for a given departure date.

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