How Do Airlines Set Their Ticket Prices?

They keep going up and down!

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Thanksgiving is the busiest holiday of the year for the airline industry. High travel demand means full seats and, presumably, full coffers for the airlines. But how do they decide how much to charge passengers?

The most important variable is competition. Until airline deregulation in the late 1970s, rates for flights were more-or-less determined by distance. Now, ticket prices have almost nothing to do with how far you’re traveling and more to do with how many airlines are competing for your business. A short route flown by few carriers may be more expensive than a long route flown by all the major airlines. For example, flights between Portland and Medford, Ore., used to boast extraordinarily high per-mile fares, at least until more airlines began offering that service. The presence of discount carriers, such as JetBlue or Southwest Airlines, can drive prices even lower on a given route.

An airline will adjust its ticket prices on a minute-by-minute basis, depending on what competitors are charging. But how do they know the other guys’ prices? Each airline enters its rates into the Airline Tariff Publishing Co.  computer system, which in turn supplies information about all the others. Plus, most airlines supply their rates and flight availability to booking systems used by travel agents and online travel sites, called Global Distribution Systems.

There is generally not one set rate for a flight, but a range of prices depending on when you buy your ticket. The airline industry engages in “yield management” to adjust how many tickets it sells and for how much, according to the buyer and the market conditions. United Airlines, for example, uses a computer system called Orion to predict passenger load, how many passengers will pay a higher fare, and the optimal time to change rates. Systems like Orion help carriers guess how many tickets they can sell, say, more than 14 days in advance at the lowest price, and then decide when to raise the price in order to make a greater profit.

The customer matters too. If a route attracts lots of business travelers, the airline may up the price for tickets booked on that route at the last minute because, generally, business travelers book flights closer to the time they travel and are willing to pay more. Likewise, it may reserve a block of last-minute seats to accommodate business travelers so they’ll develop loyalty to the airline. Vacation travelers, on the other hand, tend to book flights well in advance and are more willing to endure long layovers or weekend travel restrictions to save money.

Lately, fuel surcharges have been increasing how much customers pay. The weather, last year’s rates, taxes, the price of tea in China … pretty much anything can affect air travel prices. Columnist Dave Barry once joked that Rudy the Fare Chicken pecks at a keyboard sprinkled with corn to determine ticket prices. If Rudy is sick, he added, Conrad the Fare Hamster takes over.

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