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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Why is Flying in Canada so Expensive?

(This is part 2 of an unintentional series on expensive Canadian things. Part 1 is here)

 

Flying within Canada is very expensive. It was ranked 70th of 75 in Kiwi.coms Aviation price index which gives the average cost to fly 100km.

On a couple random dates in October the cheapest flight I could find from Vancouver to Montreal was 450$ US, or about $600 Canadian. Partially, this is an expensive ticket because Canada is a big place, but a flight to Montreal out of Seattle on the same dates was $100 (USD) cheaper. This is true, even with the US ticket having more taxes and fees. Having to pay both US and Canadian fees, plus immigration fees, adds up.

While it’s true that Canadian Airports charge high landing fees to airlines. Mostly, it’s an expensive ticket because there are only two choices on airlines: Air Canada, and WestJet.

Departing Toronto Pearson

 

Duopoly 

Air Canada and WestJet are basically the only choices when flying domestically within Canada. Porter serves a few eastern cities, and there are airlines with awesome names like Air North, and Bearskin, which will take you to places that are even colder than Montreal or Toronto. There are also a few other Canadian airlines who mostly fly to places that are not Canada such as Air Transat, and Sunwing.

The main reason, the Seattle-Montreal Itinerary is so much cheaper is because along with Air Canada, Delta, United, and American will also sell you tickets. It’s the old recipe: more firms, more competition, lower prices.

Freedoms of the Air

With so much traffic just south of the boarder, and all major Canadian airports served by multiple US carriers, one might imagine passengers could simply book a ticket from Vancouver to Montreal through an intermediate US stop. For example, YVR-ORD-YUL. This would allow US Carriers to compete with Canadian ones, without flying directly from Canadian airport to Canadian Airport. Of course, there would be the hassle and fees involved with customs, but since most Canadian Airports have US pre-Clearance facilities, you could connect in a US airport like any domestic US passenger.

This is an impossibility. Flight searches will not display any options involving connecting in the United States. The reason for this has to do with a set of rules with the decidedly romantic name of ‘The Freedoms of the Air.’ These are negotiated between countries and govern what foreign carriers are allowed to do.  Almost nowhere in the world (except for the EU) is a foreign airline allowed to operate domestic flights within a country that does not share its flag.  Not only can US carriers not fly from Vancouver to Montreal directly, they cannot even sell tickets on this route, regardless of the actual path the aircraft takes. The same is also true if you start and end in the US, you cannot go from one US destination to another and connect in Canada.

 Room for more?

If the cause of expensive fares is limited competition, is there room for more competition to bring them down?

In markets where there is too little competition firms typically have higher profits. High profits are not something the airline industry has been historically known for and Canadian Airlines are no exception.

acvswj

 

2015 was a good year for pretty much every Airline[1], but Air Canada has typically struggled to make money. WestJet has been better, but it is not a market that new companies are leaping to enter. Furthermore, barriers to entry and large capital costs (planes aren’t cheap) have always made it hard to start a new airline. Canadian airline startups may be further hampered by requirements that cap foreign investment in airlines at 25%.

Maybe the problem isn’t the number of firms but rather their type. Ultra-low cost carriers (ULCCs) have been successful all around the world. Ryanair, Spirit, AirAsia, Norwegian, and company have all managed to make money by squeezing more people into planes and then charging them for everything. Canada has no low cost carriers. Until now. Startup carrier NewLeaf[2] recently started offering flights out of Winnipeg to secondary cities across Canada such as Kelowna and Hamilton. NewLeaf has not gotten off to a strong start, suspending some flights due to minimal demand.

As domestic competition is likely to remain limited, Canadian travelers will likely be stuck with expensive tickets for a while. Unless Canada wants to give 8th  or 9th freedom rights to US Carriers. Doing so would probably be bad for the Canadian airline industry, it might not be so bad for Canadians though.

Article Seven

It won’t happen. Even if the Canadian government were interested in doing this, which they arn’t, it’s not certain it would be legal. The issue comes from the international rules concerning cabotage established at the 1944 Chicago Convention. Cabotage is when a foreign carrier transports people or goods within a country, same as the 8th and 9th freedoms of the air. One of the rules (article seven) is that countries cannot give cabotage rights exclusively to another country or airline[3]. What this means is not entirely clear. The most likely interpretation of this is that the US and Canada could not make an agreement with Canada that only US airlines can conduct cabotage in Canada. An alternative interpretation could imply that Canada may not offer cabotage to US carriers without also offering it to the airlines of other countries.  At present, the only country that currently allows foreign cabotage is Chile. It seems unlikely that Canada will be the second.

Unless NewLeaf or another Low Cost Carrier is successfully able to come on the scene, it seems that Canadians will have to continue to fly on Air Canada and WestJet, and that domestic fares will remain high.

 

Sources, References, and Further Reading.

http://www.cbc.ca/news/canada/manitoba/newleaf-puts-brakes-on-winnipeg-flights1.3766914

https://en.wikipedia.org/wiki/Freedoms_of_the_air

http://www.bloomberg.com/news/articles/2016-09-12/can-these-new-airlines-bring-canada-s-sky-high-fares-back-to-earth

http://www.icao.int/publications/Documents/7300_9ed.pdf

https://books.google.com/books?id=yhGFiwvGg5cC&pg=PP7&source=gbs_selected_pages&cad=3#v=onepage&q&f=false

 

 

 

 

 

[1] Also, the only year in which I worked for one. Not a coincidence.

[2] As a virtual New Leaf owns no airplanes, but sells tickets onto flights run and operated by other airlines such as Flair Air. Most of the regional US airlines also function in a similar manner.

[3]  The actual text is: “…Each contracting State undertakes not to enter into any arrangements which specifically grant any such privilege on an exclusive basis to any other State or an airline of any other State, and not to obtain any such exclusive privilege from any other State.”

ULTRA LONG-HAUL FLIGHTS

(The best part of this post is the map at the end)

On March 2, an Emirates Airbus A380[1] landed in Auckland nonstop from Dubai. Dubai to Auckland is 14,200 km (8823 Miles) and takes 17 hours and fifteen minutes to fly. It is the longest nonstop route currently operating. There has been a spate of new ultra long-haul routes launched recently. The previous record holder-Sydney to Dallas/Fort-Worth on Qantas-was launched in 2014. None of these can match the all-time longest route, until 2013, Singapore Airlines flew a nonstop between Singapore and Newark that covered 15,345 km and took nearly 19 hours.

GRAPH

Number of Flights by Airline Region. Airline Region is the home country of the airline so Qatar is Middle East, Air Canada is North America, etc.

How Far is Ultra Long?

There is no official definition of what makes a flight count as “ultra long-haul”. For my purposes I’ve arbitrarily decided to call any flight over 12,000 km great circle distance as an ultra long-haul flight. This is a pretty high benchmark. Sydney to San Francisco doesn’t make the cut nor does Dubai to Rio de Janerio.

emirates_a380_full

Are Ultra Long Flights Sustainable?

Long distance flights require a lot of fuel to reach their destinations. All this fuel adds weight, this weight makes the airplane less fuel efficient, which requires more fuel. Fuel is essentially being used to carry around all the fuel that will be used later in the flight. For these reasons ultra long-haul flights are expensive to operate, and are very sensitive to changes in fuel prices and economic conditions.  Many of the longest nonstop flights ever offered, are no longer being offered.  These mostly include flights from Southeast Asia to the United States and Canada. Just a few years ago, one could fly from Singapore, Bangkok, and Manila nonstop to North America. Today you can’t[2].

Partially this is due to the aircraft that were used. These flights were operated with Airbus A340s which had a very long range, but used a lot of fuel. The Airbus A350-900ULR which is due to be delivered in 2018, would allow for Singapore Airlines to resume the longest ever scheduled flights.

One might question if the current crop of ultra long flights will be able to sustain themselves. The current low fuel prices and advances in aircraft will help, but there may not be many more economical ultra long-haul routes left to launch. Emirates was supposed to launch Dubai-Panama City earlier this year, but is delaying the start until the end of March.

Map of Past and Present Ultra Long Haul RoutesMAP

What would be really neat is if there was a map that showed ultra-long-haul routes over time. You can view just such a map here.

Some Interesting Things:

  • The increase in flights from the Middle East three.
  • The rise and fall of flights from Southeast Asia to North America
  • Withdrawal of US Flights to the Middle East and India
  • Concentration of ultra long-haul  flights in a few cities: NYC, LA, Hong Kong, Dubai, Sydney
  • Increase in ultra long-haul flights over time.

Data and Sources

My flight data comes largely from this Wikipedia article, plus any other long haul routes that I could think of. If there are any AvGeeks who would like to point out that I forgot that MIAT Mongolian Airlines offered flights between Ulan Batar and Quito for several months in 2002, or anything else I may have overlooked, please leave a comment or send a tweet.

Flight distance data is from Great Circle Mapper.

It was difficult to find start dates for some routes and some route dates are imprecise. Date data comes from news articles, press releases, forums such as Flyertalk, airlineroute.net and other sources.

Great circle paths were done using the geosphere package in R, with help from this tutorial by Nathan Yau.

 

Additional Links

http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/airbus-launches-new-ultra-long-range-version-of-the-a350-900/

http://www.ft.com/intl/cms/s/2/689a1618-814d-11e5-8095-ed1a37d1e096.html#axzz43E0JLb6S

 

 

 

[1] This was just for fun. The route will typically be operated by a more reasonable 777-200LR.

[2] United is launching SFO-SIN nonstop later this year.

 

ARE FARES HIGHER AT LARGER AIRPORTS?

Like most people, I follow the Bureau of Transportation Statistics on Twitter. Earlier this month they tweeted the following chart which breaks down different sizes of airport by average fare. The conclusion is spelled out in the tweet, “Biggest airports have highest fares, mid-size lowest”.

Capture

I was surprised by this. In my experience, larger airports are cheaper to fly to than smaller ones. A quick look at the map on Google Flights shows a snapshot of fares from Chicago (both O’Hare and Midway). Some of the cheapest places to fly are Atlanta, Minneapolis, Houston, New York, Orlando, and Las Vegas. All of these are cheaper than smaller markets like Nashville, Kansas City, or Raleigh.

GoogFLights

There might be good reasons why larger airports would be more expensive. They may have the longest flights and they are often dominated by a single carrier that has their hub there.  They also tend to have international flights, but since this data is all domestic flights that shouldn’t matter.

The BTS chart at the top of this post was based on data from the top 100 airports by originating domestic passengers. Here is the same data presented with a scatterplot.

FareXAirportSize1

There is clearly a large average fare range among the smaller airports. The airport with the cheapest average fares is Orlando/Sanford airport (SFB). The nearly 250,000 passengers who originated here paid just $103.41 on average. The only scheduled domestic service at SFB is on discount carrier Allegiant, so most passengers likely had to chip in a few extra bucks for things like carry-on baggage.  Every airport with an average fare below $200 exclusively operated as bases for ultra-low cost carriers: Orlando/Sanford(SFB), St. Petersburg/Clearwater(PIE), and Phoenix/Mesa(IWA) are all Allegiant bases, while Atlantic City’s (ACY) domestic flights are exclusively on Spirit. The most expensive airport was Madison Wi (MSN) with an average fare of $524.93, followed by Harrisburg (MDT) and United hub Newark(EWR) with average fares of $479 and $478 respectively.

There isn’t much of an overall trend, maybe a slight rise in average fare as airport size increases. Certainly, the airports with the lowest average fares are usually the smallest ones. All of the airports with average fare levels under $300 also have fewer than 4 million passengers.

How small is small?

So, do smaller airports actually have lower fares than large ones?  Well, no.

The original data is based on the top 100 busiest airports in America. None of these are particularly small. The least busy airport in this sample is Atlantic City which had 137,794 passengers in the second quarter of 2015. There are many airports with far fewer passengers than that.

Fortunately, the BTS has data on average fares from those airports as well. This data includes over 400 airports including some properly small ones. Thief River Falls Minnesota(TVF) is served exclusively by Great Lakes Airlines as part of the Essential Air Service program. The number of passengers is low, but the fares are high. Average fares at TVF are over $700.  That is not even the airport with the highest average fare. That honor goes to Wolf Point MT(OLF), with average fares at just under $1000.

When the expanded dataset is plotted[1] the relationship between airport size[2] and average fares looks like this.

FareXAirportSize2

This makes a lot more sense to me. The most expensive airports tend to be the very small ones. Many of these have service from just one carrier, often as part of the EAS.  In general, as airports get busier average fares go down. Presumably, this is due to competition driving down fares. The airports with the lowest average fares are those small and midsize airports that are being used exclusively by Allegiant, Spirit, or another low cost carrier.

Note

Some of the language in this post might make it sound like passenger numbers cause different fare levels. This is not really the case. Both passenger numbers and prices influence each other simultaneously.  Lower fares may attract more passengers, while an increased number of passengers might drive up fares.

 

 

 

 

 

 

[1]I only include airports located in the 48 states and Washington DC. The Original dataset also includes flights to AK, HI, and US territories. Focusing on the 48 states does not significantly change the results.

[2] A few notes regarding the airport size data in this chart: This is from the BTS D1B1 itinerary 10% ticket sample data. The numbers of passengers shown here are the total passengers originating at that airport in the 10% ticket sample in 2014. There are risks in using prices from 2015 and passenger numbers from 2014, especially if passenger numbers or prices within airports fluctuate dramatically between years. I do not believe passenger numbers change dramatically enough from year to year to warrant much of a concern here, but it is a possible source of error.