Setting airfare seat prices is a complex trip

By Betty Stark

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Humor columnist Dave Barry had this to say about how airlines price their seats:

"Rudy the Fare Chicken pecks at a keyboard sprinkled with corn to determine ticket prices. If Rudy is sick," Barry said, "Conrad the Fare Hamster takes over."

To the frustrated business traveler on a continual hunt for the elusive "lowest fare," this observation sounds entirely plausible. After all, any pricing system that plants a traveler who paid $650 for an airline seat next to another who paid $210 to fly to the same destination can't be hitting on all cylinders, right?

So it would seem, but the process airlines use to set their ticket prices is surprisingly sophisticated and it has a lot more to do with how many airlines are competing for your business to a given destination than how far you're flying.

The system, called "yield management," is a powerful tool that uses historical models and real-time sales data to determine how many seats will be sold at a particular price on a given flight.

It generally costs an airline anywhere from eight to 15 cents a mile per seat to operate an airplane. Obviously they will get nothing for a seat that leaves the ground empty, so they willingly sell some of their seats below cost. They sell others at a break-even price and still others at way over their cost. On any given flight, prices can range from as little as three cents per mile to more than two dollars a mile.

The airlines' ultimate goal is to maximize profit on every flight, every day, going to every point in the route system. To do this, they price and re-price, and re-price again, playing with the inventory within a given price ladder of lowest-to-highest ticket prices.

This tinkering goes on 24 hours a day up to the time of departure as the yield management software analyzes, reinventories and reprices canceled seats, adjusts for escalating fuel costs, factors in whether the scheduled city pairs are more popular with business travelers than vacationers, looks at how many seats remain, and - as departure time approaches - pushes fares higher and higher. Tinker, tinker, tinker.

Rick Seaney, CEO of Farecompare.com, a research consumer Web site, whose motto is "Never Overpay for Airline Tickets Again" says "The three golden rules of cheap airfare are:

1. Competition,
2. Competition,
3. More competition."

Seaney is right - competition plays a major role in the pricing scenario. As an example, let's say that two of the Big Six legacy carriers, Delta and US Airways, have been the 800-pound gorillas in a market - let's say Charleston, S.C. - for a long time. These carriers and other airlines serving that destination have been able to keep fares to Charleston consistently high because there's really no competition and no reason to lower them.

Then another carrier, a discount airline like Air Tran, enters the picture. It announces that Charleston, S.C., is its newest destination, and - good news, Charleston travelers! - Air Tran introduces substantially lower fares that reflect its lower operating costs. Delta, US Airways and other established Charleston carriers, not wanting to lose longtime customers, roll back prices too and travelers win, at least short term.

If Air Tran can outlast the game of chicken that inevitably follows when the bigger carriers serving Charleston temporarily roll back prices, it'll have a chance of becoming an established player in that market. To do this, it'll have to build a solid base of loyal customers, luring them away permanently from the dominant legacy carriers.

Now, imagine this pricing dynamic applied to each of the average nine million airline seats that are winging around the world on approximately 77,371 flights each day, and you'll have a clearer picture of why the airfare pricing picture isn't clear at all.

All well and good, you say, but what does this mean to you, the frustrated business traveler who continually hunts for the "lowest fare?" The fact is that there really is no such thing as a "lowest fare" except for that split fraction of a second when it actually flits through an airline's constantly whirling, twirling yield management system. Your chances of nabbing it even once, let alone time after time, are probably right up there with being the sole winner of a $150 million Powerball.

Thus, if you're spending hours checking multiple Web sites for low airfares, it would be prudent to factor in the value of time spent searching. And if you typically wait until the last minute to book a flight, you might want to reevaluate this practice too, given what you now know about airline pricing practices that push fares higher as departure day approaches.

Generally, if you book your ticket fewer than 14 days in advance of departure, you'll pay more. (Important note: Larger travel agencies offer their own sophisticated fare-watch tool, one that monitors for fare reductions on booked trips and rebooks at the lower applicable fare.)
As the legacy carriers battle bankruptcy, soaring fuel costs, older fuel-guzzling fleets, employee contract demands and hostile takeover bids, the airfare pricing picture for the remainder of 2007 and beyond is murky at best.

Mergers are a real possibility and while two carriers joining as one might reduce the airlines' overhead, it is also likely to reduce competition - not a good thing for consumers.

Perhaps the only real solution to escalating airfares is fewer kernels of corn for Rudy the Fare Chicken.


Betty Stark is a Madison travel industry consultant and business travel writer with 25 years' experience. She can be contacted by e-mail at travelingwriter1@aol.com.

travelingwriter1@aol.com

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