Every once in a while we get an email like this:
“You f*ing f*ers. 3 hours ago you quoted me $285 and now the price jumps to $408. Go f*yourselves!”
While everyone’s language isn’t quite as artful, it’s fair to say that there truly is widespread confusion and frustration from travelers who can’t for the life of them understand why flight prices change so constantly.
This group includes happy customers, too. They thank us profusely because their fare has gone down. But it still seems crazy that air fares found one day so often are different the next. We once had a customer tell us that it seems like every time they check a flight there is someone, somewhere spinning a magic wheel that randomly lands on a price.
These questions are legitimate. If you’re in the group that can’t explain it, you’re not alone. And we’d like to try to shed a little light on the topic.
Although airfares sometimes seem random and as though they fluctuate without rhyme or reason, the reality is actually the opposite. Every time you see an airfare you can be pretty sure that the airline has invested an insane amount of time, energy, and computing power into determining what that fare should be at that exact moment. Even small airlines today employ extremely sophisticated pricing engines that constantly monitor flights and booking levels and adjust fares continuously to achieve their revenue goals. What may seem like a glitch to you, when a price you saw 10 minutes ago is now $50 higher (or lower), is actually proof to the airline that their systems are working as designed.
But why is it like this?
The Airline’s Conundrum
Let’s think about things from an airline perspective with a very simple example. Say we have a plane flying between Los Angeles and New York that has 100 seats on it. The airline is considering 3 possible fares to sell seats at: $100, $300, and $500. There are lots of businessmen who fly that route who are not overly concerned about price. They need to go when they need to go and, for them, a $500 fare would be just fine. Let’s assume that if the airline priced tickets on this plane at $500, they would sell 25 seats to business people like these, but the rest would go unsold. That wouldn’t be good.
So what if they lowered the price to $300? Of course, all 25 of the passengers who were willing to pay $500 would still go at $300, and maybe then the airline could pick up another 25 passengers. That would mean that at $300 they could sell 50 of the 100 seats. But there would still be another 50 seats unsold, which seems like a wasted opportunity.
Let’s finally suppose that if the airline went with the $100 fare, they would have no trouble filling their entire 100-seat plane.
So in this way over-simplified example the airline has 3 options:
– Sell tickets for $500 and sell 25 seats for a total revenue ($500 x 25) of $12,500
– Sell tickets for $300 and sell 50 seats for a total revenue ($300 x 50) of $15,000
– Sell tickets for $100 and sell 100 seats for a total revenue ($100 x 100) of $10,000
Based on these numbers, the obvious answer would be to go with the $300 fare, as that would bring in the most total revenue. Indeed, it’s basic reasoning like this that is used by most companies in most industries to price most products.
But to an airline, there are 2 things that would bother it about settling on the $300 fare. First, there would be 25 people actually willing to pay $500 but who would ultimately get their ticket for just $300. And, second, the plane would take off with 50 empty seats that bring in no revenue whatsoever. In both cases the airline sees money being left on the table – and it doesn’t like that scenario!
So what to do if you’re an airline?
In a perfect world, the airline would fill the plane by charging each person exactly the maximum amount that the person is willing to pay. So in our simple example, the airline would sell 25 seats for $500, the next 25 seats for $300, and then fill the remaining 50 seats at $100 each. But how can you do that in the real world? You can’t charge different prices to different people!
Or can you?
The airlines spend a great deal of time, money and computing power to have their cake and eat it, too. They want the people who can afford to pay high fares to pay them, but they also want to fill the additional seats on the plane with fares more palatable to the rest of us. To accomplish this, they employ a system called “yield management” which is a fancy way of saying “let’s extract the highest fare possible out of each and every seat on the plane”.
Here’s how they do it:
Unlike most things that you buy, there isn’t just one price for an airline seat. The same seat on the same plane can command lots of different prices. Which price a traveler pays will depend on a variety of factors – when you fly, when you buy your ticket, what the rest of your itinerary looks like, and, increasingly, what kind of perks you want with your seat. We’ll hold off on that last point until the end and focus on the first three.
To illustrate what we’re talking about, let’s take a real life example. Here is a response from a travel agent terminal that asks the system for a list of all the United Airlines fares from Los Angeles to Boston. As you can see below (despite the crazy confusing format), United has 28 different fares in that market – a $52 fare, a $64 fare, a $94 fare, $124, etc. ranging all the way up to $1,435 one way (yikes!).
UA LAX-BOS DEPART 27JAN FARES LAST UPDATED 27JAN 10:22 AM U.S. PASSENGER FACILITY CHARGES / SURCHARGES MAY APPLY TAXES AND FEES MAY VARY DEPENDING ON THE BOOKED ITINERARY USD FARE MIN/ XL TVL DATES TKT DATES CX FARE BASIS AP MAX FE FIRST/LAST FIRST/LAST 1 UA 52.00 NAU07AHS 07# --/-- ## 26JAN/10FEBC -/03FEB 2 UA 64.00 NAA14AHS 14# --/-- ## 11FEB/14FEBC -/- 3 UA 64.00 NAA14AHS 14# --/-- ## 11FEB/23FEBC -/- 4 UA 94.00 NAA14AHS 14# --/-- ## 19FEB/23FEBC -/- 5 UA 94.00 NAF14AHS 14# --/-- ## 26JAN/10FEBC -/03FEB 6 UA 124.00 GAA14AHS 14# --/-- ## -/29FEBC -/- 7 UA 139.00 KAF14AHS 14# --/-- ## 26JAN/10FEBC -/03FEB 8 UA 144.00 KAK21AGS 21# --/-- ## 16FEB/25MAYC -/28JAN 9 UA 154.00 KAA07AHS 07# --/-- ## 03FEB/18MAYC -/27JAN 10 UA 164.00 KAG21AGS 21# --/-- ## 16FEB/25MAYC -/28JAN 11 UA 169.00 LAA14AHS 14# --/-- ## -/29FEBC -/- 12 UA 172.00 LAK14AKS 14# --/-- ## 09FEB/25MAYC -/04FEB 13 UA 188.00 LAA14AHN 14# --/-- ## -/- -/- 14 UA 193.00 LAF14AHS 14# --/-- ## 26JAN/10FEBC -/03FEB 15 UA 217.00 TAA14AHN 14# --/-- ## -/- -/- 16 UA 238.00 SAF14AHS 14# --/-- ## 26JAN/10FEBC -/03FEB 17 UA 252.00 SAA14AHN 14# --/-- ## 07FEB/- -/- 18 UA 287.00 WAA07AHN 07# --/-- ## 07FEB/- -/- 19 UA 327.00 VAA07AHN 07# --/-- ## 07FEB/- -/- 20 UA 377.00 QAA07AHN 07# --/-- ## 07FEB/- -/- 21 UA 442.00 HAA07AHN 07# --/-- ## 07FEB/- -/- 22 UA 452.00 HAA03AHN 03# --/-- ## 07FEB/- -/- 23 UA 502.00 UAA03AHN 03# --/-- ## 07FEB/- -/- 24 UA 582.00 EAA00AHN # --/-- ## 07FEB/- -/- 25 UA 677.00 MAA00AHN # --/-- ## 07FEB/- -/- 26 UA 798.00 MAA00AFY # --/-- -- -/- -/- 27 UA 913.00 BAA00AFY # --/-- -- -/- -/- 28 UA 1435.00 YUA -- --/-- -- -/- -/-
To be fair to United, this fare structure is in no way unique to any one airline. All airlines that fly this route have very similar lists of fares. American, for instance, offers 24; Southwest 28; and Delta offers a whopping 77!
You might now be wondering, if there are 28 different fares, who decides which one gets offered when you go to book a flight?
That’s where the “yield management” comes in. An airline will use these 28-or-so fares and manipulate them to, frankly, get as much money as possible for every seat on the plane, without having too many empty seats upon take off.
Some of the tactics are straightforward and basic. For instance, the lowest fares usually require you to buy in advance – 7, 14, or 21 days. The airlines reason that most of the customers who purchase last minute tickets are business travelers and business travelers can (generally) afford to pay more. So the system is designed to make last minute fares more expensive. In this example, if you don’t buy 7 days in advance the lowest you could possibly pay would be $452.
Another tactic is to simply not offer the lowest fares on flights that are likely to be popular. With each fare, airlines attach a list of rules that have to be met for that fare to be offered. The $52 fare at the top of the list is a good example. This fare has rules stipulating that only Tuesday and Wednesday flights are eligible and only flights between January 26th and February 10th (a soft travel period.) In this way, the airline can avoid offering a super low fare like this on flights they can fill up without it. Another example: for summer travel, where flights are more in demand, none of the top 12 fares are eligible. The lowest possible fare for the summer is $188.
By placing restrictions on advance purchase and travel dates, airlines can avoid offering the lowest fares on flights where enough people will pay the higher fares and they can also, to some extent, segment out the business travelers in order to charge them more. But that’s just half the story. The real heavy lifting of yield management occurs in the day-to-day (actually minute-by-minute) evaluation of flight booking levels to determine which of the possible fares should be offered for a given flight at a given time.
Suppose you want to fly L.A. to Boston on July 1st to be there for the Fourth of July Holiday. Of the 28 fares, 13 of them have rules and restrictions which insure they will never be offered on July 1st . That leaves another 15 fares in play priced at $188, $217, $252, $287, $327, $377, $442, $452, $502, $582, $677, $798, $913, $951, and $1435. When the flight opens for sale (usually 335 days in advance) no seats have been sold so the system will use historical data to estimate how many seats they should make available at each of the 15 fares to fill the plane and maximize revenue. If the plane has 100 seats, the airline might calculate that it will only need to sell 5 at $188, because there are people out there who will buy the other 95 seats for more. The airline might further estimate that no more than another 10 seats need to be sold for $217, again based on the logic that there are 85 or more people (100 – 5 – 10) who would pay more for the rest of the seats.
On down the line it goes with the airline dynamically setting the number of seats available at each fare. The higher the fare, the more seats it will be willing to make available. Continuing with our example, we can see that once 5 people have booked, the $188 fare will be sold out; the 6th person will pay the next lowest fare of $217. And after 10 more bookings, that fare will sell out, too, and the new lowest fare will be $252.
It’s actually even more complicated! Because once a flight opens for booking, customers from anywhere in the world can start booking seats on it, and the number of total seats for sale starts to change. As bookings are made, the yield management robots watch and re-evaluate and sometimes re-calculate how many seats should be offered at each fare. If a large group books 40 seats 10 months out, the airline might reason that it will be easier than expected to fill the rest of the plane and it may reduce or zero out the availability of some of the lower fares. Conversely, if months have gone by and the number of bookings is below where it should be at that time, the airline might decide to get more aggressive and add more seats for a fare that had previously been sold out.
And so it goes, literally right up until flight time, with people booking, people cancelling, fare buckets selling out, and sometimes the yield management systems reshuffling.
When you’re checking a fare and you see a fare go up from earlier in the day, the most likely explanation is that the fare that you were seeing sold out and you have been bumped to the next higher fare category. If the fare goes down, it is often because some reservations that were being held were canceled, possibly opening up seats in a fare that was previously closed out.
Believe it or not, we took a few liberties to simplify our explanation. Primarily, we explained the yield management dynamic assuming that all the fares are constant – that is, that the same 28 fares that exist in the market the day a flight opens for sale will exist all the way through.
That is rarely the case.
During the 11-or-so months that a flight is open for sale, there are likely to be some fare sales where a lower fare pops into the picture that previously didn’t exist in the market. Usually these are short-term sales: maybe the special fare will only be offered for 24 or 72 hours.
Sale fares explain a dynamic where fares tend to be on the high side when a flight just opens for sale 11 months in advance. For domestic flights, the best time to buy a flight is often between one and four months out (what we call the “Prime Booking Window”) because inside that 1-4 month window airlines are prone to introducing sale fares, lower than the original lowest fare. Of course, how aggressive an airline is will depend on advance bookings. If a flight is heavily booked already there may not be any sales offered, whereas you can expect them almost weekly for flights that remain wide open.
There is an accelerating trend in the airline industry to try to encourage travelers to pay more than the lowest fare available by offering a choice of “upgrade” options that include extra perks for those willing to pay more. American Airlines, for example, generally offers 3 fare “brands” – “Choice”, their lowest fare; “Choice Essential” which for a little bit more but includes priority boarding and a free checked bag; and “Choice Plus” which includes everything from Choice Essential plus the ability to change without a fee, earn bonus miles, and get a free alcoholic beverage on board.
Delta has done something similar. In some markets their lowest fare is branded “Basic Economy” and doesn’t allow changes or seat assignments. For a little more you can get their standard “Main Cabin” product which allows you to pick a seat or change your ticket (for a fee). And for those wanting even more there is a “Delta Comfort” which, among other things, offers seats with extra legroom.
Branded Fares are the newest frontier of yield management. Airlines are doing a lot of experimenting all with the same goal – maximizing the revenue that each flight takes in.
“What’s in this for Me?”
If you’re still with us after all this, you’re probably thinking by now, “I kind of understand this, but what’s the point? How can this help me snag a better air fare?”
Although there’s no silver bullet piece of advice, there are a few main takeaways that we can extrapolate:
1. Flights do generally get more expensive the closer you get to flight time. This is because seats at the lowest fare levels sell out as a flight receives more and more bookings.
2. The single biggest factor that determines the price of a flight is how booked that flight is. Empty flights have all of their lowest possible fares still available. On full flights, most of the lower fares are sold out. So if you’re travelling to a popular place at a popular time, it’s even more important than usual to book early.
3. For the same reason, if you have some flexibility, try to travel when other people are not, like on slower travel days (Tuesdays & Wednesdays) or off-peak seasons. And if you travel for the holidays, try to avoid the biggest travel days where everyone flies, like the Wednesday before and Sunday after Thanksgiving (try Tuesday to Saturday instead).
4. Accept that fares can change at any time. We know this is frustrating and makes the process exponentially more difficult. But you just can’t assume that if you see a fare, you have time to discuss it with your family over dinner and come back tomorrow to buy. If you’re committed to taking a trip, when you search fares you should have a target price in mind. If you find flights that meet your parameters, grab them. They may not be there tomorrow.
Still want to do a little more research? Check out our When to Buy Flights tool for thousands of cities, or read about the best time to buy an airline ticket, based on a study of 1.3 billion airfares.