Why do Airlines change their fares constantly?

“American airlines can change about Half a million prices everyday”

Ever wondered why the ticket fare for an airline is always changing for the same class? Are the tickets price based on the distance traveled, taxes, or fuel used? How does really Airline ticket pricing work? Let’s dive in and see!

Initially, commercial airlines used to charge tickets on the distance traveled and not demand, which people could hardly afford. But, after the deregulation of the air industry in 1978, the prices started to decrease as new airlines emerged and costumers were served with choices which they never used to get earlier. The increased competition created a need for more customer traffic, which got attracted only when costumers see low fares and good quality. But how would the airline make profits if they just give away low fare tickets? 

So, to solve this problem, Former CEO of American Airlines, Robert Crandall introduced Yield Management to the air industry. But What is Yield Management? Yield management is a pricing strategy where the price variates based on anticipating and influencing consumer behavior, to increase profits.

Yield management in airlines entails the optimization of two separate factors-

1. Completely booking the flight seats to reduce the cost per passenger

2. Selling as many seats as possible at the maximum price to maximize the revenue.

Airlines change the prices for the same service class, on the same flight, within several days. Its because they want to maximize their profits and for that, they need to sell as many seats as possible at the maximum price. It is inefficient if an aircraft take off almost empty but with a couple of expensive tickets sold. And it’s also inefficient to sell all the tickets at a low price. Then what do they do?

They keep a balance between supply and demand, in simple words managing price and quantity. For that, they first understand the customers and divide them into two groups, Leisure and Business. To understand this better, let’s see an example!

So, the crux is, Advance purchase discounts and fare-bucket alteration are the two main factors for varying prices.

Other external factors such as weather conditions, Festive seasons, and some big events also play a vital role in changing the fares. This pricing strategy technique of airlines is now being used by the Hotel industry and is popularly called  Dynamic Pricing.

Key Take away

Airlines are tracking Human behavior and using it to vary the fares. But here the travel agencies and online booking platforms act as blinders to them, otherwise, they can collect exact data by directly interacting with the costumers. By doing that they can dive deep into details like, Who are the people buying their tickets? What kind of flights they are looking for? How often do they check prices? What are the links they click on?  If they get answers to these questions, they can really level up the pricing game and earn loads of profit!

What factors do you think that determines to use yield Management in an Industry? Comment down below.

References

https://pubsonline.informs.org/doi/10.1287/inte.22.1.8

https://www.cnbc.com/2018/08/03/how-do-airlines-price-seat-tickets.html