First page Back Continue Last page Overview Text


Why this mess? Why so many fares, such complicated rules, the logic of priceable units, and so on? The answer is often called variable pricing. Various airline economists make the following claim: there is no price such that the price times the demand at the price equals the cost of flying a large jet. There are a lot of technical issues that can be raised with their argument, but leaving those aside the argument is that if the airline charges $1 per ticket of course the plane will fill, but the total revenue of $150 barely pays for an hour of a pilot’s salary. If they charge $1000 a ticket then if they could fill the plane they’d make a fortune, but only a small number of people are willing to fly at that price, so again they can’t equal the fixed costs of flying a plane. But if the airline can make those who are willing to pay it pay $1000, and others pay $800, and others $500, maybe down to $100 or so, then the sum total over all passengers is sufficient to pay for the fixed costs. In fact, some estimates put the incremental cost of flying a single passenger as low as $30 (for the meal and baggage and ticket handling), so that once the airline has committed to flying the plane it is in their interest to sell a ticket for $30 rather than let a seat go empty. But they must keep those who can pay more from buying their ticket at low prices, a tough balancing act.

The airlines solve this problem in two ways, collectively called revenue management. The first is to use fare prices and fare rules to construct a system wherein the cheapest fares have restrictions that increase their perceived cost for a business traveler to the point where the business traveler will choose to buy more expensive fares. For example, cheap fares require round trip travel, prohibit non stop flights and ticket refunds, et cetera. But the cheap fares remain available for leisure travelers with more flexibility, for whom the extra restrictions are not so onerous. The second way, discussed later, consists of dynamically deciding whether to sell a given fare for a flight based on how much demand there is for the flight. For example, if a flight is not filling, lower priced fares are made available (on the grounds that it’s better to get some money than none) but on high-demand flights only the most expensive fares are available.