The way airlines choose to price their tickets
is not simple, to say the least, and many may find it difficult to navigate the complex and arduous web that is an airline’s booking platform. It is important to note that not all tickets onboard the same flight will sell at even close to the same price, something that makes a lot of sense from a financial perspective but can be rather confusing to the passenger.
When it comes to flying in different cabins, it is very easy to understand why prices vary so drastically from seat to seat. For example, the price of a lie-flat business class ticket will be quite different from that associated with an economy class fare. However, what is far more fascinating is that passengers booking seats directly next to each other in economy class may have paid drastically different prices.
We are not talking about one-time promotions or using miles to book tickets, or even different ticket classes, such as basic economy or fully refundable seats which often come at different prices. The discussion here centers around the idea of dynamic pricing to index passengers directly to the maximum price they are willing to pay for their ticket.
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Ticket prices are affected by several different factors
Onboard a standard commercial flight, you may have booked a basic economy ticket for one price, while the passenger sitting directly next to you may have purchased the same kind of ticket for a different price. The difference is often in the ticket and occurs as a combination of multiple factors.
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Typical intuition would make you think that last-minute deals make sense
At the end of the day, however, if an aircraft takes off with an empty seat, the airline is losing the potential of having a paying passenger sitting there. As a result, one would expect carriers to let these seats go away for nearly nothing, as the marginal costs associated with adding one more passenger are likely negligible in terms of fuel and the food that they may consume while onboard.
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Surprisingly enough, airlines do not let seats go near departure for nothing and rather increase prices significantly as departure dates get closer. For a good example of this, one need look no further than the Delta Air Lines website. A one-way ticket from New York’s John F. Kennedy International Airport (JFK) to London Heathrow Airport (LHR), at the time of writing, is around $700 if booked just one day in advance.
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When booking one month and a half out, however, the price drops to around $200, demonstrating this effect numerically. At the end of the day, this relates to how carriers choose to discriminate between their different kinds of customers.
Business traveler vs. vacationer separation
While low-cost carriers operate different models that focus primarily on servicing leisure travelers, legacy carriers have to serve both leisure and business travelers, and they have to find a way to make as much money as possible in doing so. Legacy carriers often have the largest, most developed networks, and provide the most convenient and luxurious services for the corporate traveler, and include all the following airlines on our example route between New York and London:
- United Airlines
- American Airlines
- Delta Air Lines
- British Airways
- Virgin Atlantic
Directly engaging in price discrimination (charging some passengers one price and others a different price at exactly the same time) is strictly forbidden by most aviation regulatory agencies. However, carriers have developed many tactics to segment these passengers, many of which affect ticket prices.
One of the primary strategies used by airlines to differentiate between business and leisure travelers is the minimum stay requirement. These provisions prevent most business travelers from purchasing lower-priced tickets that are meant for tourists. For example, most lower-priced tickets require passengers to spend a given number of days at their destination.
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In the case of the route between New York and London, the minimum stay requirement can often be as simple as requiring passengers on cheaper tickets to spend a Saturday at their destination, as can be observed on the Delta website. Business travelers almost always fly out early in the week and want to be home for the weekend, something that would prevent them from satisfying the Saturday night restriction.
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As a result, business travelers are typically pushed away from these lower-priced tickets. A breakdown from Travel & Leisure also found that this is one of the primary reasons why flights are often at their cheapest on Saturdays.
So what is the deal with last-minute tickets?
Since no revenue is obviously worse than little revenue, it is surprising that legacy airlines do not offer hefty discounts at the last minute to fill up their seats. Volodymyr Bilotkach in his 2021 book The Economics of Airlines provides a pretty good explanation for this:
“In most cases, the airlines are better off waiting for a last-minute business passenger to come along and pay the full fare.”
Here Bilotkach alludes to one of the other key attributes of the business traveller. Corporate passengers book their tickets far closer to departure than vacationers, meaning airlines can raise prices on these kinds of tickets significantly in the days leading up to departure.
Photo: Minh K Tran | Shutterstock
As a result, most discounted tickets will also require tickets to be purchased a certain number of days in advance. For airlines like Ryanair and easyJet, however, which focus exclusively on leisure travelers, finding last-minute deals can be far easier.