How are Airline Ticket Prices Determined?

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What Causes Plane Ticket Prices to Fluctuate So Wildly?

The answer to this question is quite complicated.  In short, much of how airline fares are priced is not predictable unless you happen to be the airline’s computer system that does real-time analysis of sales.  Bummer, right?  Well, sort-of.

Even though we can’t predict with certainty what the fares will be for a particular flight, there are some general guidelines for how the fares are established.  Let’s take a quick look at it from the airline’s perspective.

If Airline Seats Were Apples…

Imagine if you will that you are a fruit vendor and you have a barrel of premium apples to sell.  Who your potential customers are depend on how you price your apples.

First, you have your people with lots of disposable income who will pay you top dollar for your apples.  It would be ideal if you could sell all of your apples to those customers, but it never happens that way.  So, in order to sell the rest of your apples, you have to find the right price point in order to sell the rest of them.  Naturally, you want to make the most that you can for each apple, so you will try to give incentives for customers to buy at higher prices.  In terms of airline seats, this may be more flexible dates and the ability to change tickets.

How Deep Discounts Happen

After you have sold all the apples you can at the premium rate and the slightly discounted rates, you are left with some apples that are still too expensive for people really struggling with their finances.  You have the choice of selling those apples at a greatly reduced rate or letting them sit and rot, in which case, you not only earn no profit but you can’t even cover the cost of growing the apples (water, fertilizer, labor to pick them).  Getting something for these remaining apples is better than getting nothing, because at least it will help cover those costs.

Predicting Sales

After you’ve been selling these apples for 20 years, you can pretty much predict that you can sell about 15% of your apples at the premium rate, but the rest you have to discount.  Let’s say that you usually sell about 30% of your apples with your least amount of discounting and you sell 40% at your second-most discounted rate.  That leaves 15% of your apples unsold that you know you will have to give deep discounts to move them.

Selling at Different Rates at the Same Time

Ok, so that’s the simple part.  Now imagine that you have the ability to sell your apples simultaneously at all of these rates because you’ve figured out a way to keep customers from seeing the prices offered to other customers – and you can magically target the right prices to the right customers.  You know you are going to have to sell 15% at bargain basement prices, so instead of waiting until the last minute, you just offer that many apples for sale at that price.  Once they are gone, they are gone.  The same goes for the other discounted pricing tiers.

That explains some of it.

Customer Buying Habits are Unpredictable

The thing is that buying habits can fluctuate, so sometimes you are stuck with some of your premium priced and slightly-discounted apples, even though you have planned well.  The apples only have a day or two left before they go bad, so you offer those at the super discounted rate to get rid of them before you can do nothing with them.

Busy Seasons

On the other hand, say it’s Thanksgiving and everyone wants to make homemade apple pie for dessert.  People are rushing around doing all of their shopping and they don’t pay close attention to what they are paying for apples.  You’ve already sold your normal 15% at top dollar and you still have a ton of time before your apples go bad.  It doesn’t make sense to offer so many at the bargain basement rate, so you bump a few more into the premium rate category – and when they sell, you bump up a few more.

That, in a nutshell (or apple barrel), explains why two people on the same flight can pay wildly different fares even though they are sitting next to one another.  Of course, in reality, computers are constantly monitoring and adjusting the number of seats available at different price brackets to get the most money as possible for the seats, and fares can go up or down $100 or more in a matter of minutes.  So, how are you supposed to keep up with all of that?

You don’t have to.  Now that you can answer the question, “How are airline ticket prices are set?” use my 16 Best Tips for Finding Cheap Flights article to help you find the cheapest tickets.