How airline pricing works
As early as this month, airlines worldwide may start testing a strategy that could customise airfare pricing and itinerary results based on who is searching. These personalised fares could be affected by where you live, how often you fly, the kind of travel you do and other personal information.
In October 2012, the International Air Transport Association, a trade association representing 240 airlines (including companies such as American Airlines, Virgin Atlantic and China Southern Airlines), voted to let all airlines, travel agents and third-party booking sites such as Kayak and Expedia request personal login information – such as your name, frequent flyer numbers and contact info – in order to show you tailored search results and pricing. The airlines say this would allow them to offer personalised deals, like a special package for frequent flyers that could includes discounted airfare and seat upgrades, and increase competition on the distribution side of air travel – and they stress that logging in would not be mandatory for customers to see baseline fares. But critics worry that the measure will result in privacy violations and even discrimination, allowing airlines to charge certain kinds of passengers, such as business travellers, more than other passengers, potentially without their knowledge.
Last spring, Delta was accused of doing just this. According to the CBS TV affiliate in Minneapolis, Minnesota, two customers attempting to book the exact same flight, searching on their laptops while sitting side-by-side, found significantly different fares just because one was logged into his frequent flyer account while the other was not. After the story came out, Delta said it was due to a computer glitch that lasted about 19 days.
There could also be other potential flaws with the targeting process; for instance, if one person books flights for a group of travellers, that first person’s information could be the one used to tailor results. In addition, consumers concerned about online privacy may not like the new standard, called New Distribution Capability, since it gives airlines another venue for collecting their personal information. Following trials, the New Distribution Capability could be fully rolled out by 2015 or 2016, according to the International Air Transportation Association.
The fact is, airlines already set and alter fares based on who they believe will fly where and when. As the Wall Street Journal reported, a trip from Washington DC to Hartford, Connecticut may be far more expensive than a flight from DC to Barcelona, Spain, simply because airlines expect the DC to Hartford route to attract mostly business travellers. Last-minute tickets sometimes provide a similar example. As the departure date approaches, airlines don’t usually lower prices to fill their last few seats; they jack up prices, hoping last-minute buyers will be desperate travellers or business travellers – customers with little choice but to book anyway.
But considering who is flying is just one piece of the puzzle when it comes to the complex world of airfare pricing. Long gone are the days when government regulation forced flight prices to be based on flight lengths (longer flights require more fuel, longer staff hours and larger planes, which also need more maintenance). Today, a great many factors – including the length of your flight, the length of your trip, the airports served, how far in advance you book, what day of the week you book on, what days of the week you book for, what time of year you book for, whether you book around holidays and what rules or restrictions apply – are plugged into the elaborate algorithms that ultimately decide the many different fares available for a single route on one airline – or even within a single cabin on one flight. As a group of MIT grad students found, one roundtrip domestic flight on one airline can yield tens of millions of different possibilities for routes and fares. If, for example, your desired route is served by one or more budget airlines, such as Southwest or AirAsia X, that is a significant consideration for mega-airlines, such as United or British Airways, which are forced to reduce their prices for at least some economy fares in order to compete. If low-cost airlines aren’t in the mix for a particular trip, you’re likely to encounter much higher fares across the board.
Budget airlines work by providing bare bones service as cheaply and efficiently as possible and then charging for any and all extras. To keep prices low, their strategies can include: making smaller airports their hubs (to reduce airport fees), jet fuel hedging (committing to long-term fuel contracts that lock in current prices), using one aircraft type for all flights (to cut maintenance and staff training costs), making the whole plane an economy cabin (which reduces staffing needs and aircraft costs), and making seating “first come, first serve” (to cut the costs associated with intricate booking systems). When searching for fares on budget airlines though, be aware of the fees. Standard ones include baggage fees, food and beverage fees and fees for paying with a credit card. But getting creative with fees allows some airlines to push prices down even further. This is why budget airline Ryanair, notorious for offering ultra-cheap fares around Europe, also charges for reserved seating, priority boarding, bringing infants on board, carrying musical instruments or sports equipment and re-issuing boarding passes.
In the US the emergence of low-cost airlines including Southwest and Spirit Airlines has contributed to a phenomenon that most flyers are surprised to discover. According to The Atlantic magazine, airfare prices have steadily fallen – by about 50% overall – since the US airline industry was deregulated in 1978, making it possible for budget airlines to emerge and compete.
Today however, economists and passengers worry that the scope of competition is rapidly diminishing, as more large airlines merge to make mega-airlines. This year, air travellers are waiting to find out whether the latest merger, the marriage of American Airlines with US Airways, will reduce competition further, causing prices to rise and customer service to fall. Just last week, the massive merger was approved in court, paving the way for what will be the world’s largest airline.
When the merger is said and done by fall 2013, a mere four airlines will control some 70% of the world’s air travel. This latest bit of news will no doubt create additional factors to throw into the mix when it comes to setting fare prices. Prospective passengers can only hope the impact won’t be higher prices for fewer perks.
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