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The dark arts of airfare pricing, explained

Posting in Transportation

massive plane awaiting its tiny passengers at SFO.jpg
Buy now or wait and hope the fare drops? It’s always a gamble.

One reason for that frustrating casino feel is what’s known as revenue management, Businessweek explains. That’s the airlines’ 24/7 effort to improve financial performance by allocating the number of seats at various price levels and overbooking flights.

The average global airline analyzes about 100 million fares a day. That computerized alchemy is actually an algorithm-based field of math and computer science. (In other words, rocket science.)

Bill Brunger of PODS Research, a revenue management consultancy, is a former vice president of Continental Airlines. Scott Nason of SDN TT&H Consulting is a former vice president of revenue management at American Airlines. Here’s what they have to share.

Advance-purchase rules help segment airline seat prices into different market categories, with a single flight often having 20 or more fares. That model -- with purchase deadlines of one to 90 days -- helps revenue managers deal with seat inventory that usually comes onto their books a year before the departure date.

Airlines also overbook most flights. The amount of no-show passengers has been remarkably stable over the years, so carriers can predict which routes and days correspond to a high number of absentee fliers. It’s also financially lucrative -- overbooking accounts for 2 percent to 4 percent of the industry’s entire revenue.

1. Book early-ish.

Fares purchased 21 days early generally cost less than those bought a week or less before travel. So don’t wait too long, hoping the airline will be desperate to sell tons of empty seats three to four weeks before departure. (That’s rare.)

The closer you get to the advance-purchase deadlines, the more clarity airlines usually have on their pricing forecasts. When it works as planned, revenue management means an airline has sold exactly the number of seats at each fare level that it had intended. Closer to departure, the seats that are left cost far more.

2. But not too, too early.

Buying flights nearly a year in advance won’t help you get the best ticket price. Revenue management people don’t know too much a year out, and when they’re nervous, they usually pick a default level that’s conservative.

3. Book at a price satisfactory to you, and then stop looking.

If you can live with the cost and it seems decent, take the plunge. Airlines are much less likely to refund you the savings than they used to be -- so you don’t need to keep shopping afterwards, watch the price drop, and feel that remorse. Remember: few people are obsessive or patient enough to keep tabs on routes’ pricing at all times

The two discussed airfare pricing yesterday at a conference hosted by Airlines for America.

[Businessweek]

Image: Angelo DeSantis via Flickr

— By on September 25, 2013, 3:56 AM PST

Janet Fang

Contributing Editor

Janet Fang has written for Nature, Discover and the Point Reyes Light. She is currently a lab technician at Lamont-Doherty Earth Observatory. She holds degrees from the University of California, Berkeley and Columbia University. She is based in New York. Follow her on Twitter. Disclosure