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Airline Mismanagement

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When is the Best Time to Buy an Airline Ticket?

Part 1 :  Theoretical Considerations
 

Airfare tickets

Travel costs vary hugely, even for the same seat on the same flight.

Part of the art of getting a lower fare is to know when to buy the ticket.

Part one of a three part article on When is the Best Time to Buy an Airline Ticket - please also visit

1.  Theoretical Considerations
2.  Theory Put Into Practice
3.  Web Services to Help You

 

 

In the 'good' old days (prior to deregulation), it was kinda sorta simple.  You had almost no choices in airfare at all, and airfare sales were far and few between.  Hmmm - maybe that wasn't all that good, after all.

The Yin and Yang of the unregulated 'free' marketplace is that we have a bewildering variety of fares, which change regularly, both up and down.  For every time this might work to our advantage, there is probably at least one other time when we end up paying more than we could (should) for our travels.

This three part article series hopes to give you the knowledge and understanding to become a more informed and better shopper when it comes to buying airfares.

Multiple Factors at Play

There is an interesting series of conflicts at play when it comes to pricing airline tickets.

Airlines have a split personality - they desperately want to sell as many tickets as possible, but at the same time, they want to sell each ticket for as much money as possible, and they don't want any cheap tickets they sell to harm their ability to also sell expensive tickets.

Let's look at things first from an airline perspective to understand what they do and why.

Airline tickets are notable for two things in particular - firstly, for the airline, their services have very high fixed costs but very low variable costs.

Secondly, they are perishable.  That is, once a plane has departed, you can no longer sell any more tickets on that flight.

Let's consider each issue in turn and what it means when it comes to the pricing (and timing) of airfares.

High Fixed Cost, Low Variable Cost

This means that while it might cost an airline $30,000 to operate a flight empty other than for crew between two cities, the extra cost it has to pay for each passenger who takes the flight is trivial; indeed, these days with almost nothing included, the variable cost for one more passenger is little more than the cost of the jet fuel.

For a three hour flight, the extra cost of adding one more passenger is probably about $10 (with jet fuel at about $3/gallon) or possibly slightly less.

So think about these numbers.  Say this $30,000 flight is on a plane that holds up to 200 passengers.  That means, if the flight is full, the airline has to average $150 per passenger to cover the fixed costs of the flight and another $10 per passenger to cover the variable costs, ie, $160 per passenger.

But now look at the 'fine print' of this sentence.

The first part is 'if the flight is full'.  If the flight is perhaps 80% full rather than 100% full, clearly the airline has to get more per passenger for the fixed costs ($187.50 rather than $150).

The second part is 'average' - the airline needs to average a certain amount.  But we know some passengers pay higher fares than others, so it isn't necessary for the airline to get exactly the same amount for every passenger.

The third and perhaps most important part is that the variable cost per passenger is only $10.  In other words, if the airline sells a ticket for as little as $20, it still makes money (and more money than we might think when you add on all the extra fees these days for baggage, a nice seat, food, and so on).

So, while the airline needs to sell tickets, on average, for about $200 or so, all included, to cover the cost of its flight and make a small profit, any time it finds itself with empty seats that it knows it won't otherwise sell - whether it be the extra 20% of seats between the 80% load factor it is projecting and the 100% theoretical maximum, or any part of the 80% which it seems won't sell normally, the airline is tempted to sell these unsold seats for anything at all.  It is better to get some small contribution from these otherwise unsold seats than nothing at all.

There are three counterbalancing factors to this eagerness to fill seats at almost any price.  The first is the airline must be reassured that by selling a seat at a very low price it won't make it harder to continue to justify its very high prices for other seats on the same flight.

The second is for the airline to be sure that the person who is buying the bottom dollar fare would not be willing to pay more for the fare.

The third is for the airline to be sure that the flight won't end up oversold, and/or to get in the unfortunate situation of having sold too many steeply discounted tickets so that it ends up unable to accept much higher priced ticket sales.

The airlines approach the first two issues in a couple of main ways.  The first way is by 'secretly' discounting the flights - for example, by selling the tickets at low prices to tour operators that will bundle the tickets in with other travel items such as accommodation, touring, car rentals, so as to make it impossible to tell how much the airfare itself cost.

The second way is by creating all sorts of rules to restrict the fare, limiting its appeal to only what the airline thinks to be truly bargain motivated travelers.  An obvious type of restrictive rule is a 'no changes, no refunds' type rule - this makes the fare much less appealing to a business traveler who typically may wish to make changes to his itinerary.

As for ensuring that the flight doesn't end up with too many cheap tickets sold, crowding out the ability to sell more expensive tickets, the airline does that through a very sophisticated yield control and inventory management process that on a daily (or hourly or even more frequent) basis controls the numbers of seats available for each fare type, based on past booking patterns and how the airline projects the flight to continue to fill up.

These yield management programs can be extremely sophisticated, and will be factoring in a huge number of variables, and learning from each previous flight's booking history to adapt its projections for all future flights.

An ideal scenario for an airline is to never refuse anyone's attempt to book a flight at higher fare levels, while at the same time, having the flight depart with every seat sold, no matter what the fare.

Air Tickets are Perishable

We learned of one duality in the previous section - airlines need to sell tickets for a certain average price, but also need to sell as many tickets as possible, at any price at all.  They want their flights to depart full.

There is another duality at play due to the perishability of air tickets.  On the one hand, the closer to departure of a flight, the more desperate an airline becomes to fill it up (in theory - you'll never detect the slightest hint of desperation when talking to a reservations agent in their (800) reservations center!), because it is getting ever closer to the point when the flight will depart and they'll no longer have any more chances to sell tickets on that flight.

But - on the other hand, the airline also senses that their own desperation to sell tickets closer to a flight's departure date is matched by increasing levels of desperation on the part of travelers, who in some cases have increasingly urgent needs to fly somewhere for some important reason, no matter what the cost may be.

The airlines would hate to see those people 'sneak under the wire' and end up getting last minute bargain fares rather than being trapped into paying last minute top-dollar prices.

Airlines (and other sellers of perishable products too) have learned not to discount their fares too much, closer to departure time, or else their customers will in turn learn to simply wait until the last minute to buy their travel needs.

The most extreme example of this was in the cruise industry.  The industry in its early years of rapid growth found itself trapped in a vicious cycle of discounting closer to cruise departure to fill empty cabins (cruises are very similar to air fares - they too have high fixed and low variable costs for their perishable products), and so the cruising public learned never to book in advance and to wait for the discounts; while the cruise lines found themselves increasingly panicky with fewer forward bookings and greater pressures to discount closer to sailing dates.

The cruise lines eventually broke out of that cycle by announcing they would never sell cruises, close to departure, for less than the original advanced purchase prices.  They've more or less stuck to that intention for many years now, although there are lots of 'loophole' type exceptions if you go looking for them.

So here is the time tension the airlines experience :  The closer to departure date, the clearer the indication they have if a flight will be sufficiently full or not, and the less time they have to sell more seats to fill it.  But at the same time, there are two very different types of remaining potential passengers - those who will suddenly discover a need to travel, no matter what the price, and those who will go on a short notice discretionary trip, but only if the price is very appealing.

The difficult to answer question the airlines struggle with - how to get all the 'I need to travel no matter what the price' passengers, and to gouge them on their fares as much as possible, while still topping up unsold seats with passengers who will only travel if the price is massively discounted?

How the Airlines Play Their Air Fare Games - And How You Can Play Those Same Games, Too

Which now brings us to the next part of this series.

Now you understand what the airlines want to do, need to do, can and can't do from the preceding information, so please click on to read part two of the series about what and how the airlines respond to these contradictory pricing pressures they face.

Read more in the rest of this series

This is part one of a three part article on When is the Best Time to Buy an Airline Ticket - please also visit

1.  Theoretical Considerations
2.  Theory Put Into Practice
3.  Web Services to Help You

 

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Originally published 20 Apr 2012, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 

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