What really affects Airfare Prices?

Have you ever searched for a flight, only to find out the price has surged within a few hours? Checked with another passenger sitting next to you, only to find out, the person paid lower or higher price for  similar seats that you have? Airline pricing is a mix of market demand, operational cost, psychology, competition and use of algorithmic spells. These parameters are used to make the most out of each seat being sold. 

Let's slowly begin to accept that Airlines is a weird industry where no price tag is ever set in stone and understanding it goes beyond the ticket counter.

Here's a list of what affects the prices behind the curtain:

1. Demand Forecasting

Process of anticipating future demands by analyzing historical booking data based on seasons, scheduled events and consumer trends. Simply put, if there is a Coldplay concert happening anywhere in the world, the data provided to the airline shows a surge in interest to travel to that location where the event  is held which indicates an increase in demand. This drives the prices upwards strangely even if the plane is empty. Similarly if the forecast of booking is lower than expected, the airlines drop prices temporarily to drive more sales. The Same reason applies for higher fares you experience during weekend or holiday season.

2. Competitor Pricing

Airlines constantly monitor their competition and adjust prices to stay in the game. This concept is very predominant and sometimes even a bit aggressive when it comes to popular or overlapping routes where even the smallest difference in price can swoop away a majority. They use software with complex algorithms to detect the price of another airline routes in demand and then take action by dropping ticket fares to match or even undercut the competition.

This strategy is very important for airline across the globe especially while dealing with price sensitive travelers and also helps airlines to keep their market share stable for the long run even if it means an immediate sacrifice in margin.

3. Load Factor Optimization

A key element when it comes to airfare prices, load factor optimization is ensuring to fill seats in a plane with the highest average fare possible. We already established that airlines don't sell all seats at the same price. If the objective is to fill 90 percent of seats on an aircraft, airlines will open certain percentage of seats at cheaper fares for early bookings and block it, to ensure sufficient seats are filled. They later open some of the seats for late bookings where the fares would be higher. 

This process is essential because if all seats are sold cheap, you fill the plane but risk leaving money on the table. Hold the seats too long for high paying customers, there is a risk of flying with empty seats. 

4. Fuel Cost Adjustment

Fuel contributes to a huge chunk of expense in the airline industry. Naturally the fares increase when there is a spike in global demand for fuel. This would be added in the base fares or sometimes reflected with full transparency added to the ticket bill as "fuel charge". Companies usually forecast an upcoming wave in fuel prices and re-value the ticket price well ahead. Geo political situations or global shut down which recently happened in case of a pandemic could be reasons. This proves to be a very unstable domain for the airlines and so they usually adopt fuel hedging where they secure fuel from oil companies at predefined rates there by stabilizing the budget.

To conclude, Airlines rely on psychology of the consumer to raise the ticket fares by creating a vaguely visible dent. They increase the price by a small percentage, where the traveler would consider it as a natural shift and chances of questioning it is less likely. They try to keep the base fares to a minimum but rely more on the ancillary revenue secured through seats selection, extra baggage allowance or meals.Ultimately, airline ticket prices are a result of calculating profitability and analyzing customer behavior. Some might think of these strategies as clear manipulation but once we see the other side of the coin where airlines struggle to provide optimal service to the passengers and run a cost efficient business, it is easy to accept that these measures are an absolute need.

More exciting information on the Airline Industry coming your way.

Stay tuned.