The fluctuation in flight ticket prices often seems more of a mystery than logical. But there is more science to it than what we perceive. Let us try solving the “mystery” behind the dynamic nature of airfare movement.
Occasionally, passengers have been turned away despite holding a legitimate ticket because that particular flight is overbooked. This is called “bumping” — when an airline overbooks a flight. This does not happen often though such cases receive much media attention.
Writing for Illumin Magazine, Kiera Shepard says that while bumping may appear to be the consequence of an error by the airline attendants or computer system, it is a highly well-calculated wager on how to maximize income.
“Airlines try to fill each aircraft to ensure there are no empty seats or lost potential revenue, and for every flight, they bet that a handful of passengers either cancel or don’t show up. Most of the time, the airlines bet correctly, and the aircraft ends up nearly full, and no one gets bumped,” Shepard says in her article, The algorithm behind plane ticket prices and how to get the best deal.
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This helps airlines fill their flights as much as possible, ensuring that the flight load (number of people who board the flight) is as close to the capacity as possible (number of seats on the aircraft).
The lost revenue associated with every seat left empty by a no-show comprises more than just the cost of the seat because it also includes all of the possible passengers who would have purchased that seat but were turned down and whose business the airline has, therefore, lost to a competitor.
The number of passengers turned away is called the “spill,” which is the difference between demand, i.e., the number of potential passengers interested in booking the flight, and the load. Even when a flight is completely booked, there is typically a spill since more individuals were interested in the flight than the total number of seats, the article says.
Shepard says airlines work to minimise the revenue loss from spills by pushing low-paying passengers into the spill group instead of high-paying passengers. They do this by protecting or reserving a group of economy seats on every flight for “full fare” flyers.
Instead of letting an entire flight fill up far in advance with lower-priced tickets, airlines reserve some seats so that last-minute bookers, paying the higher last-minute price, can buy these seats and increase the airline’s revenue for that flight.
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The tricky part comes when an airline has to decide how many seats to protect and for how long. If it doesn’t reserve enough seats, some high-paying flyers might be turned away as the flight is already overbooked.
On the other side, if there aren’t enough last-minute bookers, the flight could be under-booked despite having a large spill of low-paying customers. Even when running predictive models to optimise revenue losses associated with under-booking (empty seats), collapse (refused customers) and overbooking, many airlines still struggle to exceed a 5 per cent operating margin.
Airlines employ the protection method for high-paying, last-minute customers. These seats are not visible to the average customer without elite status because they are likely to book in advance at a lower price or use miles or points to cover a portion of the fare.
However, these seats are visible to customers with elite status as they are more likely to reserve seats at the last minute at a higher price, especially since many with select groups are business flyers who are willing to pay a higher fee for certain times compared to more flexible leisure travellers. It is worth noting that these seats become open to all flyers at check-in 24 hours before the flight.
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According to Flightfox, an online platform that books and manages travel, airlines first determine the type of plane they will use for a flight, and this tells them how many seats are in each travel class.
While a travel class indicates class quality (First, Business, Premium Economy, or Economy), a booking class refers to the ticket type. Each booking class (aka fare class or fare bucket) has different rules and restrictions. For example, the cost of changing or refunding a passport can vary widely; some can only be booked if your flight is more than 14 days away or only on weekdays, and sometimes you earn more frequent flyer miles (or none at all).
Each booking class has a different price based on these factors. And although there may be 100 seats in Economy, there may only be 10 seats in each fare bucket. Online sites like Expedia.com and Kayak.com will show you the cheapest booking class available that matches all of your criteria, Flightfox says.
The reason for all these booking classes is that airlines try to maximise their profit. They know there are mainly two types of travellers: leisure and business. They both need flights, but their buying behaviour is quite different.
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While the leisure traveller is (generally) more flexible with dates, business travellers have to travel on a particular day and often in a specific time. So, while one might expect the airlines to lower their prices a few days before the departure day to occupy the last seats, the opposite is true: Selling 20 per cent of the remaining seats for Rs 5,000 is more profitable than selling half of them for the regular fare of Rs 2,000.
Where you might see prices fall close to the departure date (or even well ahead of this) is where the cheaper buckets haven’t been entirely sold out yet, and the airline opens up a new discounted booking class, trying to cover their costs for the flight at least, Flightfox says.
Finding a cheap ticket is likely on a Tuesday, Wednesday, or Saturday. In addition, if the passenger is okay with less convenient departure and arrival times, the better is their chance of paying less since most people prefer to leave at 9 am instead of 5 am or return before 8 pm, not 11 pm, according to Flightfox.
Shepard also favours a similar timeline. According to her, the best time to buy a ticket is late on Tuesday or early on Wednesday in the time zone the airline is based. This is because most low-fare tickets are opened on Monday. A few people tend to book flights early in the week; so after a total of 24 hours open with low demand, the fares will likely get bumped down again, hitting their weekly low sometime on Tuesday or Wednesday. Then, later on, Wednesday and throughout the week, more people tend to buy or look at plane tickets, bumping the fares back up.
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Furthermore, demand, and therefore price, tends to be higher at the beginning of the month after everyone receives their pay cheque. So, consider booking on the later half of the month. The seats tend to price up into higher buckets, regardless of demand, in weekly cycles as the flight gets closer.
So, starting 21 days before the flight date, the prices will go up slightly. This happens again 14 and seven days before the flight; so your best bet is to book more than three weeks in advance.
Shepard says that with an understanding of how dynamic pricing for plane tickets works, one can buy the right tickets at the right time to avoid inflated prices. Dynamic pricing depends on the current flight demand, how many protected and unprotected seats are left, the type of flight, and when you are booking.
Airlines use what is known as the nested booking policy as the optimal booking control structure and is widely used by airlines. It involves dropping booking fares into “buckets” based on the perceived demand, which is determined by the number of seats reserved at a specific price.
When lots of low-fare tickets are bought, the demand increases and the computer system will lift the chairs in that group into a higher fare bucket. This means that the customers pay more for each seat, increasing the airline’s revenue.
Conversely, if the demand is low, the chairs will get knocked down into a lower fare bucket, hoping to stimulate demand for a “better deal”. This method places hearts into the highest possible price bucket that customers are willing to pay, thus optimising the load and the revenue of the flight.