Why Don’t Air Fares Drop Just Before Travel?
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The Type of Flyer
“It’s a combination of things. Most airlines bet last-minute business travelers will pay more and are willing to risk missing out on a handful of low-yield customers,” said Al Lenza, an airline industry veteran and consultant.
Low-yield customers include leisure travelers, who tend to book long in advance, said Scott Keyes, of Scott’s Cheap Flights, often because they have specific vacation days or times of the year they can vacation. In contrast, Keyes said, “Because it’s their companies footing the bill, business travelers don’t care what the fare is.”
“The only slight exception to the rule are budget airlines like Spirit or Frontier,” Keyes said. “Because business travelers rarely fly on budget airlines and (the airlines’) core clientele is vacationers who are more price-sensitive, these carriers don’t have the same ability to jack up last-minute fares. Even still, budget airlines’ last-minute fares tend to be higher than what they had been a month or two prior, just not as outrageous as last-minute fares on full-service airlines.”
In addition, the airlines aren’t in a rush to fill planes.
Butts In Seats Is Not the Answer
“If the airline has only a few seats remaining close to departure, it must determine whether it will maximize revenue by selling the seats now at a discounted price or wait to potentially sell the seats even closer to departure at a higher price, presumably to a passenger traveling for business, at a higher business-level fare,” said Dr. Gerald Cook, adjunct professor at Embry-Riddle Aeronautical University.
The risk of seats going empty can be calculated, and nowadays it can be calculated with some precision. Airline revenue-management teams use highly sophisticated software and have historical sales data on which to base decisions. At the heart of the calculation is the statistical concept of probability. The demand for airline travel, like the demand for most products, fits a bell curve. Without getting too far into the weeds, this means that the airlines can estimate the probability of a particular fare selling on a particular date close to travel and the best revenue they can squeeze out of a seat.
It’s called “expected marginal seat revenue.” The revenue teams know that a $200 (~£163) fare will sell near 100% of the time and an $800 (~£653) fare will sell, say, 50% of the time. That means that while the $800 (~£653) fare might only sell half the time, the airline can accept spoilage because, on average, it’ll earn at least $400 (~£326), more than if it sold the seat for $200 (~£163) to avoid flying an empty seat. “If the probability of sale times the higher price is greater than the certain sale now at a lower price, (an airline) should hold the seats for late sale,” Cook explained. That means the airlines will hold the line — and all of them will hold that line in roughly the same way — as the flight approaches.
“This method of deciding whether to discount seats for late sale or hold the seats for a last-minute sale at a higher price would maximize revenue over the many flights (an airline) operates,” Cook explained.
Setting Passenger Expectations
Revenue management is part art and part science and the subject of much academic research. It all started with the British Overseas Airways Corporation or BOAC (now British Airways) and Kenneth Littlewood, an employee of the airline. In 1972, he wrote this paper on the concept of maximizing the revenue on a particular flight, rather than maximizing the number of passengers carried. While it seems obvious today, Littlewood’s paper applied a mathematical approach to solving the problem of how many seats to offer at what fares.
This began the development of probability models that ensure you won’t get a last-minute deal on your flight from JFK to LAX.
Mike Arnot is the founder of Boarding Pass, a New York based travel brand, and a marketing consultant to airlines, none of which appear in this article.
Featured image: Screen grab from Google Flights