How Airline Ticket Pricing Works

Airline ticket pricing is dictated by algorithms and passenger demand, explaining the sudden spikes and falls.

Many of us have spent time trying to work out the best strategies for buying airline tickets. Choosing off-peak dates, searching for flexible destinations, adding stopovers, and more tools all can help. But to really understand ticket pricing, it pays to look at it from the airline's point of view. How do carriers determine price, and what are the factors for changing the price?

Read more: Skiplagging: What It Is, And Why It"s Controversial

The early days of prices

It will come as no surprise that ticket pricing is a well-developed, constantly evolving process, mostly controlled these days by algorithms. Pricing is, in most cases, automated, based on airline experience and set parameters. This, of course, was not always the case.

Before the 1970s, many countries had some form of regulated ticket pricing. This did not fully change in the US until 1978 (with the introduction of the Airline Deregulation Act). Regulations in the US previously defined which routes an airline could operate and the fares that could be charged.

The changes to this opened up flying to many more travelers (and airlines) and generally lowered fares, but not without some pain and bankruptcies.

To give an idea of pricing before deregulation, some figures are given by Stephen Breyer in a 2011 Bloomberg article. He writes:

"In 1974, the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: USD 1,442. Today one can fly that same route for USD 268."

Airfares today - Pricing for the market

Of course, pricing these days is not fixed or controlled, and airlines will seek to maximize profits made through ticket sales. A ticket can be worth different amounts to different people, and pricing is about determining this value and making the most from it.

The concept of ‘booking classes’

Pricing and availability of fares are determined these days using a system of ‘booking classes.’ These are different to travel class (economy, premium economy, and business class, for example) and are a series of letters that define the fare level paid. IATA first defined these codes in the late 1940s to promote consistency across airlines and aid the acceptance of tickets between companies.

These have changed and diverged since they were introduced, and different airlines use many more booking classes today. But some are generally consistent, including:

• F for full-fare first class
• J for full-fare business class
• Y for full-fare economy

The booking classes used for discount levels below full fare differ between airlines. For example, with most oneworld airlines (including American Airlines and British Airways), discount business class is represented by D, C, R, and I class. With United Airlines, business class uses J, C, D, Z, and P (R is used for premium economy, and I previously for first class).

Revenue setting and management is a combination of setting fares for each of these booking classes and controlling availability by selling certain numbers of seats in each booking class.

Algorithm-based pricing and historical data

Each airline uses its algorithms and AI technology to set and change prices. This, of course, requires human oversight but is a long way from the days when fares were set and changed manually.

Price setting is backed by extensive data analysis. This is an area that has seen significant improvement in recent years. Airlines have always been aware of past sales and booking data and have used this to influence prices going forward. But with the improvement of data analysis technologies, this data can be analyzed and used much more precisely.

More purchases are now online, which adds to the data that can be used. Airlines can track and store not just sales data but customer interest and searches.

What factors do pricing algorithms consider?

Airline price algorithms, of course, are not made public and are a closely guarded secret. There are many things we know that influence prices, though. Here are some of the main factors include the following (remember, there are many more, and they will vary between airlines):

Leisure or business passengers / Customer profiling

One of the simplest but most important divisions is between leisure and business passengers. They each have very different requirements, buying habits, and budgets. In general, leisure travelers tend to book further in advance (often several months or more for long-haul routes) and are much more flexible. Business travelers will book closer to departure and be prepared to pay more for certain flight times.

The simplest response to this is that fares start high on leisure route fares and reduce closer to departure, and the other way around for business routes. If you take a look at last-minute short-haul fares between business cities, you will easily see this.

But there is obviously more to it than this. Many routes carry both business and leisure traffic, and of course, each passenger is different. The ability to be more flexible changes as technology and data improve. These days, this may include customer profiling and offering fares based on previous searches or purchases. Airlines are starting to do this, but there is a long way to go, both in ability and regulation.

Length of advance purchase

As we all have experienced, prices can vary significantly over the months leading up to a flight. Using historical data, airlines are increasingly able to predict the best way to price tickets to maximize sales and revenue.

One area we have seen changes in recent years is last-minute pricing. While it may sound like a good idea to lower prices last minute to fill seats, it could undermine earlier higher pricing if airlines did this regularly. Airlines have started offering last minutes upgrades, though, selling premium cabins for much lower rates.

Current sales volume

Of course, one of the main factors that influence price is the current ticket sales. You would expect that when there are only a few seats left on a flight, the prices will be much higher.

Airlines will make a certain number of seats available in each booking class, and as the lower booking classes sell out, only higher fares are available. On some routes, though, airlines may keep selling heavily discounted fares on full flights (if they don't think anyone will pay the higher rates).

Sales volume can also have a very short-term effect. Algorithms will constantly look at sales volume and increase prices if there is a pick-up in demand.

Length of trip

Several factors that can affect the fare are related to the characteristics of the trip booked. You will often see these specified against particular fares or promotions. Again, this is another way airlines try to maximize revenue from different types of customers. And again, this will be different for every route. But in general, lower fares will usually require a long stay, and likely over a weekend.

Historically, most ‘full service’ airlines have offered lower prices for return trips and much higher fares for one-way flights. While this is still the case with many fares, more airlines have started to offer attractive one-way fares. Low-cost airlines usually operate such a ‘point to point’ pricing system, so other airlines are adapting to compete.

Level of competition

Airlines monitor competitor fares on the same or similar routes as part of determining their fares. If one airline lowers prices on a particular route, it is common to see others follow quickly.

This has been reported and studied several times. For example, an in-depth study by the MIT International Center for Air Transportation in 2013 looked at the effect on airfares when low-cost carriers moved into new routes. It showed significant reductions from 'legacy airlines' when Southwest Airlines, JetBlue, Allegiant, or Spirit Airlines started the same routes.

Peak and ‘blackout’ dates

Airlines will often set different fares or limit the availability of lower booking classes at certain times. Departures around major school holidays are an obvious example of this, where prices may be higher even when booked far in advance. But all routes and countries can have specific dates considered peak. And for events not seen in advance, algorithms will often pick up on spikes in booking and raise prices.

Level of overbooking

It remains common for airlines to ‘oversell’ flights, particularly on certain routes. This can be an inconvenience for passengers and costly for airlines when regulations demand customers are compensated. But it is still part of pricing and is another area that improves with better data analysis. Predicting how many passengers will not travel (perhaps no shows, changes of plans last minute, or missed connections) allows airlines to manage this better and reflect in pricing.

Fuel and oil prices

Fuel is a major part of airline costs, and this obviously needs to be covered by prices. With sales often months in advance, airlines need to consider how prices are changing and predict future costs (although they also hedge and fix prices in advance).

The effect of this can also be seen by looking at ‘fuel surcharges.’ These additional fees added to tickets were introduced by many airlines amidst rising prices in the 2000s (it peaked in 2008). Some airlines removed these once prices lowered (and hedges expired), but most still remain.

Setting new ticket types and unbundling fares

One of the pricing trends we have seen in recent years is airlines offering lower fare types but with fewer inclusions. This began with low-cost airlines, but the fuel service carriers have since followed. Airlines will set a low base fare but exclude extras such as luggage allowance, seat selection, and even entitlement to some frequent flyer benefits. All the major US airlines now offer such fares (with Delta being the first to introduce it fully).

This has been done not just to stay competitive with low-cost carriers but also to improve ranking in search engines. More and more passengers search for fares online, and airlines with a higher base fare will be penalized in such searches.

Future of airline pricing

How will airline pricing change over the coming decades? The only thing that is certain is that airlines will continue to set prices to maximize profit. And the power of analysis, and data available to airlines, will continue to grow, as it is in most industries.

The last two years alone have seen a significant change in pricing. While prices collapsed in 2020, they rebounded swiftly in 2021 for domestic travel and have been on an upward trend for international ones this year too.

Longer-term, one area set to grow is the maximization of total revenue. Algorithms and forecasting have been developed to set base fares and plan seat availability and demand. For many airlines, there is still much more that can be done to predict and optimize revenues from ancillary products and services.

So-called ‘Total Revenue Optimization’ will become increasingly important as the split between base and ancillary revenue increases. According to an interesting report by SABRE in 2017, ancillary revenues for airlines reached USD 59.2 billion in 2015 and were growing at nearly 20% a year.

To succeed with this, airlines will have to analyze even more data and link several sources. Low-cost carriers are probably ahead in this area, and many of their systems and sales processes have been designed around total fare and add-ons. In contrast, many legacy carriers will have more of a challenge to match pricing levels to predictions for extra sales.