Airline Industry 104: Fares Part 2 of 2 – How Airlines determine them (and how to properly compare them)

Class is back in session following that brief recess 🙂

In the previous post, I spoke of the different factors that affect the pricing of tickets. This will follow on from that and look at Fare classes and Overbooking.

Fare Classes

There’s a common misconception that there’s a single economy fare and a single business class fare. The reality is that most airlines have multiple fare classes within each sitting area. On any given flight, you might find there are 5 or more different economy fares – each with its own price and restrictions. As an illustration, lets say that you have economy classes Y, B, M & Q. These might be some of the restrictions you find:

Now, the above is information that can be easily established by going onto any airline’s website to book a ticket. The question I often hear asked is Why? Why do airlines do this? The truth is that there isn’t a single or simple answer. However, let me try and outline some of the possible reasons:

1. Customer Requirements – Different customers require different things from their tickets. Some might want the cheapest possible while others might want maximum flexibility to change their travel plans. Rather than trying for a single “one size fits all” fare – which will inevitably leave several customers dissatisfied – different classes are created to offer different options.
2. Advance Planning – From a planning perspective, the ideal situation would be to know well in advance of a flight how many passengers you’ll be flying. It allows the airline to make a early adjustments if required like i) combining flights if they are too empty to be operated economically (and advising the passengers of the same in good time) and ii) change the scheduled aircraft to another of suitable size if required. With this in mind, the airline will offer the incentive of a cheaper ticket earlier so as to encourage more people to book as early as possible. In this way it’s exactly the same as the reduced ticket price for a Music  Concert for those willing to purchase in advance rather than at the door. SIDE NOTE: The flip side of this is if there is no premium to be paid for late bookings, then people will book as late as they possibly can. This creates a late booking market where an airline has no visibility on how full a flight will be until the very last minute – often leaving it with the unenviable position of choosing between flying an empty flight at a loss or cancelling it at the last minute and frustrating the passengers.
3. Profitability mix – In order for an airline to remain in operations it needs to be profitable. Different fare classes and how much is availed per class to the buying customers enables the airline to manage the mix in the way that will result in the highest profitability.

Comparing Fares

When Comparing Fares of two different airlines, it’s important to ensure you’re comparing apples to apples. Is the routing the same or is one flight direct while the other has stops? Are both flying to the same airport? Is the flight on the same day of the week or similar time of day? Are the fare classes the same – or similar enough that they have the same restrictions / flexibility?

In practise airlines will close the cheaper fare classes the closer to the date of departure and the closer they are to filling the plane. Therefore, if you happen to look at the ticket pricing of two different flights that are at different levels of filling up, chances are you will be looking at different available Fare classes.

Overbooking

This is often a source of frustration for passengers because it sometimes results in being bumped off a flight. In truth though, airlines overbook to help preserve their revenues.

Roughly 10% of tickets booked and paid for end up being ‘No-shows’. For a multitude of reasons, at the last minute, passengers do not  show up for their flights. This is a significant chunk of revenue to lose – most tickets will be refunded or changed to a later date at a fee that is far less than a new ticket. So, in order to protect against that loss, airlines overbook their flights to compensate.

Response to Question Asked:

I was asked the following question on Facebook.: “Please explain why a ticket to US (Nairobi to Washington; Business) will cost Airline A: $6,600, Airline B: $3,400 and Airline C: $2,800.”

There could be several reasons. One possible reason is that Airline B & C might be flying to the destination on their own planes from NBO to IAD. If Airline A is not doing the same i.e. they are selling seats on another airline that they are codesharing with, then they might not have as much control of the ticket price.

Airline B and Airline C can set their own price – even if it is below the actual seat cost – or it may be the lowest fare class in business class with other classes costing more. In a code share, though, Airline A could have been told by their code share partner “We’ll give you 5 seats in business class at $4000 a piece – ” or “We will only allow you to book business class on Fare Class J” or something similar. Airline A will then have to add the cost of their leg of the trip (plus a bit of a mark up) resulting in a much higher fare.

This concludes the lesson on Fares 🙂 Please let me know your comments and queries below.