Jan 31, 2020 How Do Airlines Use Pricing to Make the Most Money?
So how do airlines use pricing to get the most money when everyone who wants to fly seeks to spend as little money as they can? Airlines offer bargain fares under certain conditions but they can’t make any money if they filled the plane with passengers only paying low fares. In fact, airlines want to charge as much as they can but they also want every seat sold on every flight. So they try to get passengers into loyalty programs so they will pay more to get miles they can spend. When loyalty members cash these rewards in, it does not cost them that much if they can get many of the passengers to take a seat they can’t sell. I will do another post on loyalty programs in the future.
The way airline pricing works is like this: They have analyzed how tickets are sold for each flight (same origination and destination, day of week, season, departure time, etc). Think of this as the same flight last year. They look a multiple years for each flight. They construct a schedule of what proportion of tickets (cumulatively) has been sold from the time sales open on a flight to the date/time the flight takes off. Typically when the flight is first available for sale, some number of seats is offered at a fairly low price. This gets the process started. The progress of selling seats on the flight is monitored and compared to the schedule. As time goes on, if sales are below the schedule, they offer some more at a discount until the sales to date (% of capacity sold) is back on schedule. If the sales run higher than the schedule, they start to raise prices or eliminate any availability of the lowest price fares or the lower priced seat categories on that flight. This continues until the flight is sold out or takes off. In this way, they sell out the flight and get the most for the seats on the plane. This is called dynamic pricing and is used by airlines as well as other activities where any unsold seats are lost revenue-hotel rooms, tours, adventure events (zip line), etc.
Bryan B Mason
Apollo Consulting Group, Newport, RI
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