Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Airlines Price Your Seat by the Minute
Transcript
- Lucas: So, Luna, you're planning a trip to London for October. I remember you mentioned you were watching fares. What happened when you finally decided to book? Luna: I hesitated one night. The next morning, the same seat was two hundred dollars more. I nearly gave up on the trip. That's got to be one of the most frustrating things about flying. Lucas: That frustration is the exact product of one of the most sophisticated pricing machines in the world. Airlines are the undisputed masters of dynamic pricing. They don't set a price and hope it sticks. They run relentless simulations to squeeze every possible dollar out of every seat. Luna: But it's not just that they raise prices as seats fill up. I've seen prices drop a week before departure. It seems random. Lucas: Right, and that's the key insight. The price you see is not based on a simple count-down. It's based on a constantly updated forecast of demand, competitor prices, and how long the airline is willing to wait. They're trying to maximize revenue for the whole flight, not just for a single seat. Luna: So let's get into the mechanics. How do they actually do it? Lucas: Let's take a concrete example. A typical direct flight from New York to London. The aircraft might have 250 seats. The airline doesn't see this as 250 identical seats. They break the cabin into maybe 20 to 30 fare classes, each with its own price, rules, and availability. Luna: So a basic economy fare and a fully flexible business fare are in different classes. But what about two economy passengers sitting next to each other? Lucas: They could be in completely different fare classes. One might have paid four hundred dollars, the other eight hundred. The airline doesn't care about fairness. They care about filling the seat at the highest price the market will bear. Luna: And the system that decides which fare class to open or close is called the revenue management system. The airline's secret sauce. Lucas: Exactly. These systems are descendants of the yield management models developed by American Airlines in the 1980s after deregulation. They were among the first to use massive computing power to optimize pricing in real time. Luna: So what kind of data goes into that forecast? Obviously, historical bookings. But anything else? Lucas: Lots. They look at seasonal patterns, day of week, even the time of day of the flight. They track how quickly seats are selling for this particular flight compared to similar flights in the past. They also monitor competitor prices on the same route and adjust to stay competitive. Luna: And they know exactly when you're likely to book. I've heard that booking on a Tuesday can be cheaper. Lucas: That's partly a myth, but there is a real pattern. For many leisure routes, the cheapest time to book is around 54 days before departure. That's an average. The system is constantly shifting that sweet spot based on demand forecasts. Luna: So if I'm flexible, I could set a price alert and wait for a drop. But it's risky because the price might also jump. Lucas: You've just described the core of the airline's game. They want you to feel that tension. So you book before it's too late. The fear of missing out is a powerful revenue driver. Luna: And the system is also constantly testing. I saw a headline about a study where airlines moved prices by a few dollars just to see if you'd click. Lucas: That's a real tactic, though they don't do it as openly as some might think. They might test a small increase on a specific fare class to see how many bookings they lose. If the loss is small, they keep the higher price. It's all about elasticity. Luna: So, essentially, the price you pay is a reflection of your willingness to pay, not the cost of flying. That feels a bit manipulative. Lucas: It is, but it's the airline's version of price discrimination. They're trying to capture consumer surplus. The same seat on the same flight can be sold to a business traveler who's booking last minute and to a leisure traveler who planned ahead. Luna: And the business traveler pays a massive premium because they need flexibility and they have an expense account. The leisure traveler might be more price-sensitive. So the airline separates them by the rules of the fare, like requiring a Saturday night stay. Lucas: Exactly. That Saturday night stay rule was a classic carve-out to stop business travelers from buying cheap leisure fares. They've evolved, but the principle is the same. Luna: Now, this dynamic pricing isn't just limited to airlines anymore. We see it in ride-hailing apps with surge pricing, and even in e-commerce. Are airlines still the best example? Lucas: Airlines are still the textbook case because they've been doing it for forty years, and they've refined it to an art. They have to. Their product is highly perishable. Once the plane leaves, an empty seat is lost revenue forever. So they're obsessed with selling every seat at the best possible price. Luna: So what happens when a flight isn't selling well? They drop the price drastically. But then they risk cannibalizing their own higher fares if they drop too early. Lucas: That's the delicate balance. If they drop the fare too much, they might sell out early but leave money on the table. If they hold the price too high, they might fly with empty seats. The system is constantly optimizing to avoid both outcomes. Luna: And it's not just the base fare. It's the ancillaries too. Baggage, seat selection, priority boarding. They're all dynamically priced as well. Lucas: Absolutely. That's where the real profitability is now. The base fare might barely cover the cost of fuel and crew. The money comes from those add-ons. And they use the same demand forecasting to price a checked bag or a preferred seat. Luna: So, as a consumer, is there any way to beat the system? Or are we all just pawns in their algorithm? Lucas: You can use their own tools against them. Set price alerts, be flexible with your dates and times, and consider booking early for peak travel, but wait for off-peak. Also, clear your cookies or use incognito mode when you search. The system can track your browsing history and might nudge the price up if it knows you're coming back. Luna: So that's not a myth? Airlines actually track your search history? Lucas: Some do. It's not universal, but it's a known tactic. They might not track you personally, but they can identify a 'high-intent' user based on frequent searches for the same route. And they can adjust prices accordingly. Luna: That's a little creepy, but it makes sense. The more you search, the more they think you're going to book, so they can test a higher price. Lucas: Right. But here's a cool trick: if you're flexible, you can sometimes book an 'open jaw' or a 'hidden city' itinerary to get a cheaper fare. But that's a whole other rabbit hole. Luna: So, after all this, is there any ethical line that airlines are crossing? Or is it just good business? Lucas: There's definitely a line when it becomes deceptive. If they're showing a price and then hiding fees until the last step, that's problematic. But dynamic pricing itself is not unethical. It's just smart, using data to meet demand. You see it everywhere now. Luna: And we should mention that this episode is actually useful when you're booking your next flight. You'll know to check the price patterns and not panic when you see a jump. Lucas: If today gave you any useful angles on how to approach booking, the way we keep this show ad-free is through listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. It helps us keep doing deep dives like this. Luna: And honestly, every little bit helps. We love putting these together, and we appreciate anyone who finds value in it. Lucas: Now, back to the algorithms. It's worth noting that not all airlines are equally sophisticated. Budget carriers often use a simpler model, while the big legacy carriers have entire teams of data scientists constantly tuning their forecasts. Luna: So when we see a fare war on a specific route, is that a sign that the algorithms are colliding? Lucas: Kind of. When one airline drops a fare, the others often match within hours. The system reacts automatically. It's not collusion in the legal sense, but it often results in lower prices for consumers on that route. Luna: So ultimately, the airline industry has basically solved the pricing problem. They've turned a commodity into a dynamic market where every seat is worth a different amount to different people. Lucas: And they're doing it in real time, every second of every day. It's a remarkable feat of technology and economics. The next time you see a fare jump by two hundred dollars overnight, just remember: somewhere, a server just ran a simulation and decided you were willing to pay a little more. Luna: I'll keep that in mind. But I'm still going to book my next flight in incognito mode.