Ever wish you had the chance to ask the airline industry burning questions about how they come up with pricing, and why change fees are so darn high?
Well, wish granted.
I consulted a few insider sources — alas, they’re a little media-shy, so they’d prefer not to be named — and put the tough questions to them.
Oh, and don’t worry if I didn’t answer one of your queries. I’ll get to those next week …
First, let’s talk pricing. Why do flight prices seem to change from minute to minute? How are they determined? This answer is just as complicated as you would imagine it to be, so get ready.
What’s the life cycle of an airline seat?
Airlines — like any business — want to maximize revenue. This has been especially important historically, as profits have been hard to come by for a number of reasons, many of which are outside of the industry’s control (e.g., fuel prices).
Now, each seat on a given flight has a life cycle, from the moment the airline publishes the initial fare months in advance of the flight, all the way to when the flight attendant closes and locks the door. However, as that door closes, any unoccupied seat represents lost revenue. Think of vegetables or fruit with an expiration date. Once the plane leaves, the airline will never be able to capture that revenue.
Therefore, airlines do everything they can to maximize the bookings (butts in seats) on each flight.
Can you explain the price difference between seats?
Airlines are selling to extremely different audiences for nearly every flight. These range from leisure travelers looking for the absolute cheapest fare and booking far in advance to business travelers who will pay a premium to book at the last minute.
This is why you rarely see prices go down as it gets closer to a flight. Because if the airline has done its job correctly, they will be able to fill those seats with people willing to pay much more than the base fare. Think of it this way: If you have 10 seats left on a flight, it’s better for the airline to sell two seats at $1,200 than it is to sell five seats at $400.
Why are there so many fare classes?
A seat isn’t just a seat (deep, right?). On a three-class flight, you will have multiple booking codes within each class. This is probably the single greatest source of confusion for folks booking tickets, be they travelers or professional travel agents.
An easy example here is refundable vs. non-refundable. Certain travelers will pay more money to have the flexibility to change their flights. Generally, these changes happen at the very last minute, so the airline prices that fare accordingly, in the event that they are unable to resell that seat.
There will be other codes as well, such as those reserved for travel agencies who do a lot of volume with a particular airline across its network or even just on a single route.
Can you please explain codesharing?
Codesharing is when one airline will sell tickets on a partner carrier in order to grow their network and offer their travelers more destinations. A good example here is United and Lufthansa between Washington Dulles (IAD) and Frankfurt, Germany (FRA). Depending on the airline, there may be different fare codes, so it may actually be cheaper to book a flight via Lufthansa that is operated by United than via United directly. (Yes, I know how crazy this sounds, and in reality airlines go out of their way to avoid these conflicts.)
It’s important to remember that something as simple as the day you’re flying could have an impact on the ticket price. It’s why the same flight will cost more to fly on a Monday than on a Tuesday — business travelers fly on Monday. Therefore, airlines want to take maximum advantage of that fact.
At the end of the day, there may be no more true case study of the use of dynamic supply and demand at a microeconomics level than an airline ticket. Yes, pricing is confusing, but it’s not designed to “scam” the customers or deceive them. It’s designed that way to accommodate as many travelers as possible, while still allowing the airlines to make money in the process.
And, remember, prices don’t really change “by the minute,” so if you see a fare, don’t think you can’t shop around. You have the time. Just as the airlines do, focus on maximizing the value for your money. Take a look at different days of the week, check airline websites for codeshare partners, and think through how much your time is worth (e.g., do you want to connect or fly direct?).
Why are change fees always so high?
The issue goes back to the fact that an airplane seat is a perishable product with an expiration date. It’s also the reason that they have the various fare codes. You could have purchased a refundable fare for more money upfront, but with flexibility in the event things changed. The charge is designed to cover these last-minute changes and their impact — not just on your original flight, but on the new flight as well.
It’s important for customers to really consider the possibilities associated with their trip. What are the odds that you will have to change your plans, for example? Take a look at refundable vs. non-refundable fares and make the decision that best fits your situation. It’s a part of risk management for both airlines and their customers. Change fees are in place because even if you pay the difference in fare, if the airline can’t resell your seat, they’re losing money.
Why are some shorter trips more expensive than longer trips?
For the most part, you should expect prices to go up as the route gets longer. But, as I’m sure is clear by now, this industry is very complex, and therefore an answer is never as simple as that. There are a few factors at work.
Obviously, if you have a route with high demand (JFK to LAX), there will likely be competition and fares may be cheaper than less popular routes (e.g., Richmond to Syracuse). Some of this competition may include LCCs (low-cost carriers) and essentially create a price war and a race to the bottom. Of course, there are exceptions to this — for example, when one airline dominates a market.
There’s also a second part of the equation. Airlines are always looking to find economies of scale. In the industry, cost is often measured as cost per available seat mile (CASM). Every flight has its fixed costs, including everything from the insurance, pilot salaries and ground operations to the back-office operations such as the finance department or the fees airlines pay to global distribution systems (GDSes) with each ticket transaction.
This should be where the ticket prices begin (again, it’s never as simple as that, but for the sake of this discussion, we’ll make the assumption).
In order to maximize the efficiency of operations, most airlines operate a hub and spoke model. This way, they don’t need to fly unpopular routes like Richmond to Syracuse that may have only a few passengers on the flight, a lot of empty seats, a lot of lost revenue and likely a net loss on the individual flight. Rather, most airlines have several large hubs through which most of their flights are routed. Examples include Atlanta (ATL) for Delta, Chicago O’Hare (ORD) for United, and Dallas-Fort Worth (DFW) for American.
So, for our example, an airline will fly a full flight from Richmond to a hub (let’s say Charlotte) with passengers heading to multiple destinations — not just Syracuse. They will then fly another plane to Syracuse from Charlotte with people whose travel started throughout the Southern portion of the country that morning.
This model, while requiring extra time, actually helps airlines keep ticket prices down, as each flight is more efficient. Yes, it still may be more expensive to fly from Richmond to Syracuse than from JFK to LAX, but it’s much cheaper than it otherwise would have been.
Last year airlines made $38 billion on ancillaries and this year fuel prices are as low as they have been for years. Can’t airlines afford a little loss to keep customers loyal and happy?
The short of the long of it is that airlines are now finally making profits that should allow them to stay ahead of broader market forces for the first time in decades. This comfortable position will allow them to actually reinvest in their products and hopefully make life more comfortable and enjoyable for passengers.
These profits are the result of ancillaries, stable and declining fuel prices — which makes flying cheaper — and several other factors, such as consolidation. All of this combines to make the airlines more attractive to investors, which allows them to raise equity through financial markets. In fact, this year is the first since the mid-1980s that airline stocks should actually outpace the S&P 500.
We are already seeing the outputs of these profits.
Airlines are upgrading their fleets, which isn’t cheap — an Airbus A380 can cost anywhere between $300 and $400 million, while even a Boeing 737 costs anywhere between $50 and $80 million.
Additionally, airlines are enhancing their traveler experience. For example, there are more planes with Wi-Fi, or in-seat entertainment. All of this is changing while prices remain relatively stable. That can’t be understated. Per the Airlines Reporting Corporation (ARC), agency ticket sales in 2015 have been down 1.4 percent through October, while transactions have been up 5.8 percent. From that data, it can be strongly inferred that prices are down year over year.
(As an aside, airline ticket costs have been largely in line with inflation since airlines were partially deregulated.)
The fact of the matter is that the average traveler expects to pay as little as possible and receive the highest possible service in a highly unstable and highly regulated industry. Should airlines be more customer-centric? Absolutely. And airline insiders tell me we’re finally at a point of that happening across the board because carriers are finally financially stable.