Why are airfares so volatile?

 (and how to get the best prices)

There are few products that have more consistently fluctuating prices than airfare. Most products have largely consistent prices, but airfares can change even day to day.

seatac

Load Factor

There are a few reasons airfares are so volatile. One reason is that, unlike most businesses, airlines can’t store their inventory. An unsold seat is worth nothing to an airline, so they are constantly trying to figure out how to fill every seat. The metric that measures this is called the load factor, which is the percentage of seats filled.

It would be trivially easy to increase load factors by simply having very cheap fares. This might be nice for filling seats, but is not so good for making money. Airlines are constantly trying to balance charging high fares, while not letting any of their seats go unfilled.

To maximize their revenues, airlines are some of the most devoted practitioners of price discrimination.

Price Discrimination

Price discrimination is the practice of selling the same (or a very similar) product to different people for different amounts of money. It is most effective when different groups of customers will pay radically different prices for a similar product, and when these groups can be identified and divided.

For airlines, price discrimination largely involves splitting passengers up into two main categories: business travelers and leisure travelers. Business travelers tend to book closer in to their travel dates, are less picky about price, require more flexibility, and must be home by dinner on Friday. Leisure travelers are much more interested in price, and much less interested in anything else.

To split up customers into these different groups, airlines attach different rules to different fares. What this means is that airlines don’t create a single fare for each route and date, they create a whole bunch, each one with different rules and restrictions. These rules can usually be read on the website of the airline or travel site you are booking on.

farerules

These rules limit the travel dates along with requiring booking three days in advance

Using exclusively capital letters, the rules list various restrictions, such as how far in advance a ticket must be purchased, what dates are available for travel, how long the traveler must stay before flying back, and others.  If a fare has a rule that requires a Saturday stay, for example, it will be far less attractive to business travelers even if it is considerably cheaper.

Each fare has a code (called the fare basis code) which serves as the fare name. Different sets of rules are attached to different fare basis codes. The first letter of the fare class is often used to determined if those fares are available, and is also used to determine things like upgrades and frequent flyer mile earnings.

fbc

Inventory

For any given route, at any given time, for any given airline, there are many different fares in existence.

Just because a fare exists, does not mean it is necessarily available for purchase.

Airlines monitor the bookings on each flight and adjust which fares they are selling accordingly.  If it looks like a flight is filling up airlines will stop selling some of their cheaper fares. If bookings are slower, and there is a risk of the flight going out unfilled, they will make their cheaper fares available. You can sometimes see this, for example United will show you if there are tickets available in each fare bucket, If you ask it nicely.

FARE CLASSES.png

How to Buy Cheap Tickets?

There are numerous websites and blog posts that promise to deliver on mystical secrets of buying cheap airfares. They might recommend buying 54 days in advance or looking for fares on Tuesday at 3pm. While this isn’t necessary wrong, booking earlier is typically better than booking later, most of the time there just isn’t a magic bullet. All airlines have teams of people explicitly devoted to making sure you don’t get a deal on a plane ticket. These people usually do their jobs well. Ultimately, the ability to get good deals on airfare depend on where you are leaving from, how flexible you are, and how much time you spend looking.

Location

Airfares differ widely between cities. In general, the larger the city, the more competition, and the more options available, the cheaper the fares will be. Some exceptions to this might be major hub cities such as Atlanta where one airline has significant pricing power. Out of regional airports, options will be limited, and the opportunity for very good fares, especially overseas, will be subsequently limited due to minimal competition.

Costs

The most reliable way to find cheap airfare is to travel in the offseason or put up with all the many inconveniences that people will pay a little more to avoid. Airline demand is predictable with the seasons and days of the week. Travel is generally cheaper on Tuesdays, Wednesdays, and Saturdays, because these are times most people don’t want to or can’t fly. In addition, early morning flights are usually cheaper because getting up at 4am to catch a flight is terrible[1].

Attack Fares and Mistake Fares 

The other side of flexibility is being able to book a fare at a moment’s notice. The best deals are unlikely to stick around for long, and can be gone in matter of hours.

An example of a fare that is unlikely to stick around is an attack fare. These are fares that airlines put into each other’s hubs, in order to get back at their competitors.  In this old example, Delta put cheap US-Europe fares, in San Francisco, Washington DC, Cleveland, Denver, and Houston, all of which just happen to be United hubs. Since these sorts of fares are designed to send a message, they tend to be alive only briefly.

Every now and then an airline will make a pricing mistake, which can make for very short lived, very cheap fares. Cheap fares might also go away soon after they hit travel blogs or flyertalk, as people tend to buy up all the available inventory.

The better the fare, the quicker it will either sell out or disappear. Fortunately, you can nearly always[2] cancel a ticket for free within 24 hours of booking, so you always have at least 24 hours to think on it.

Monitoring

Since these fares can come and go quickly, it pays to pay attention.

My favorite tool for monitoring is  Google Flights. It comes with a cool map, which makes it easy to check out prices for different destinations. Unfortunately, it does not include flights from Southwest, which must be viewed at Southwest’s own website.

googleflights

Google Flights allows you to get alerts if the price for a route drops. There are a host of travel blogs, twitter accounts, and websites such as airfarewatchdog that monitor airfares. The mileage running forum Flyertalk is also a good source for unusually cheap fares, especially for those trying to accumulate frequent flyer miles. (Flyertalk is also an excellent source for a particularly snooty sort of pedantry).  If none of these reveal good options, check Skiplagged  to see if there is a workable hidden city option. 

No Free Lunch

Volatility in airfares comes from the perishable product, complicated price discrimination, changing inventory, and the competition between airlines. While there isn’t a magic rule for booking cheap flights, booking reasonably far in advance and traveling at unpopular times are the most reliable ways to get cheap tickets. Monitoring airfares, airfare blogs, and websites will keep you informed of unusually good deals, and being able to book on short notice will let you to take advantage of them.

All of this starts to sound a lot like work. It is work that I find diverting and enjoyable but many others may not.

Your mileage may vary.

 

 

 

Sources, References, and Further Reading

 

http://www.demarcken.org/carl/papers/ITA-software-travel-complexity/ITA-software-travel-complexity.pdf

http://money.usnews.com/money/personal-finance/articles/2012/04/18/8-insider-secrets-to-booking-cheap-airfare

https://www.cheapair.com/blog/cheapair-news/the-best-time-to-buy-a-flight-is-54-days-out-or-is-it/

 

 

 

[1] Getting up at 4am for any reason is terrible.

[2] If you booked your ticket in the US prior to 7 days before departure. AA allows you to ‘hold’ a ticket instead.

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