Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Airlines Price the Same Seat Differently
Transcript
- Lucas: There's a flight this afternoon from New York to Los Angeles. Coach cabin, roughly 180 seats. And on that single flight, you could find four hundred different prices. Luna: Four hundred? For the same product? That sounds like either genius or chaos. Lucas: It's genius, if you're the airline. This is yield management — also called revenue management. And no industry does it better than airlines. The basic idea: sell the right seat to the right customer at the right price at the right time. Luna: But how do they actually pull that off without just angering everyone who paid more? Lucas: They don't avoid anger — they manage expectations. The secret sauce is a system of fare classes. Despite what you see on the booking website — economy, premium economy, business — internally airlines use around seven to ten fare buckets for each cabin. Each bucket has its own price, its own rules, and its own limited inventory. Luna: So the same seat can be in bucket M or bucket Q or whatever, and the price depends on which bucket you buy into? Lucas: Exactly. And those buckets aren't just arbitrarily priced. They're linked to demand forecasts and booking patterns. The airline knows from historical data how many leisure travellers will buy 21 days out, how many business travellers will book three days out, and they set the number of seats in each bucket to maximise revenue. Luna: This started with American Airlines, right? I remember reading about something called the Sabre system. Lucas: Right. Back in the 1980s, American launched a frequent flyer program and a computer reservation system called Sabre. But the real breakthrough came when they realised they could use that data to price seats dynamically. A fellow named Robert Crandall, American's CEO at the time, drove it. By the mid-80s, they were adjusting prices based on how many seats were left and how close to departure. Luna: And that's when we got the crazy range of fares. I remember my dad telling me he once paid $1,200 for a domestic round trip while his colleague paid $400. Lucas: Classic. And it's still happening. The algorithm reprices inventory every 10 to 15 minutes, reacting to bookings, cancellations, competitor moves, even weather. Delta, United, and the rest all use variations of this. The math is surprisingly straightforward at its core: if you have more demand than expected, you close the cheap buckets. If bookings are slow, you open more cheap seats. Luna: But doesn't that create a perverse incentive? If you wait long enough, won't the price drop because they want to fill the plane? Lucas: Not necessarily. For leisure routes, yes, you often see last-minute deals because the airline would rather sell a seat for $100 than fly it empty. But for business-heavy routes, like New York to Chicago, the cheapest seats sell out a month in advance, and last-minute prices skyrocket because business travellers have less price sensitivity. Luna: So they're segmenting the market based on time sensitivity. Clever. But also kind of ruthless. Lucas: It's textbook price discrimination — charging different customers different prices for the same product based on willingness to pay. Airlines get away with it because they've trained us to accept it. We all know that booking late is risky, booking early might not be best, and that no two people on the plane paid the same. Luna: Is there a downside for the airline? I mean, if everyone tries to game the system, doesn't it break? Lucas: That's the fascinating part. The more informed the customer, the harder it is for the airline to keep the tiers in place. There's a whole subculture of travel hackers — people who use fare alerts, incognito windows, and even VPNs to see different prices. But the airlines fight back with opaque pricing, like the 'book now, pay later' features or locking in fares with a fee. Luna: And then there's the rise of ultra-low-cost carriers like Spirit and Ryanair. They've almost turned the model inside out — you pay a base price for the seat and then everything else is extra. They're basically unbundling the product. Lucas: Right. Yield management for them is about the base fare being as low as possible, then charging for bags, seat selection, even carry-ons. That's a different game. But the core principle remains: segment and price accordingly. Luna: I want to go back to the algorithm for a second. How does it handle overbooking? That's basically selling more seats than exist, right? That's a pricing decision too. Lucas: Absolutely. Overbooking is a key part of revenue management. The airline forecasts how many people will no-show, based on historical data. Then they sell tickets up to that number. Sometimes they guess wrong, and you get bumped — but the airline then has to pay you compensation, which is factored into the model as a cost. The optimal overbooking level balances the revenue from an extra seat against the expected compensation cost. Luna: So it's all math. Data-driven pricing. I guess that's why the big guys invest so much in teams of revenue managers and data scientists. Lucas: They do. Every major carrier has a revenue management department with dozens of people tweaking these algorithms daily. But the algorithms themselves are becoming more sophisticated — now they use machine learning to predict demand at a granular level, even down to individual customer segments based on your past purchases. Luna: Creepy. But effective. So what's the takeaway for a business owner listening? Could a small business use yield management? Lucas: Definitely, on a smaller scale. If you have a service with limited capacity and perishable inventory — like hotel rooms, restaurant tables, or consulting hours — you can price based on time and demand. Even a 'happy hour' discount is a crude form of yield management. The key is to understand your demand curve and be willing to change prices often. Luna: That takes guts. Most business owners hate changing prices because they fear customer backlash. Lucas: It does. But airlines have proven that customers will accept dynamic pricing if the logic behind it is transparent — or just ignored. The secret is to frame it as 'deal' culture rather than 'surge' culture. People love a deal, they hate being gouged. Luna: Before we wrap, I want to note something about this show. We deliberately keep it ad-free. No sponsors, no commercials. That's a deliberate choice — we think these conversations are worth having without interruption. If you've gotten value from them, you can support that choice at buy me a coffee dot com slash fexingo. No pressure, just a way to keep it going. Lucas: Yeah, it's a small thing but it makes a difference. And we appreciate those who do. Now, back to pricing — one more thing on airlines that always amazes me: the seven-day rule. Many airlines release their cheapest seats exactly 21 days before departure, not earlier. Luna: Really? So the best time to buy is 21 days out? Lucas: For domestic leisure routes, often yes. But for international, it's more like 60 days. And even then, it's not a guarantee. The algorithm adjusts in real time. So the next time you book a flight, just remember: the person next to you might be paying half your fare — but they probably don't know it either. Luna: A little ignorance can be bliss, then. Thanks, Lucas. Lucas: Thanks, Luna. Until next time.