eli5: How do airline pricing algorithms work in general?


Assume each airline different, but they clearly track each others’ prices, and certain market dynamics/forces/availability levels seem to cause the algorithms to get derailed into nonsense land. Ex: I am looking at flight from between two cities 1000km apart. a month from now i see $159 dollar flights. looks like average in the 200s. this week, two airlines both show options tuesday and thursday. Airline A, tues nonstop economy: $1500 (lol), B $1300. thursday A: $670, B: $590.There is just no way anyone is buying for 1500 right? are there people out there (that can’t afford private) but hate money so much they are spending 1500 on a one hour flight? or do runaway algorithms actually cost airlines sometimes?

In: 25

those algorithms are super complicated. the goal is to fill up the airplane with people willing to pay the highest price.

Yes someone might pay that $1,500. I used to travel a lot for work. I would be told “we need you at this site Thursday.” So I booked whatever made that happen. It wasn’t my money so who cares. So yeah you might be sitting next to someone who paid 10x what you did to be on the same flight.

Of course there are people spending that much.

The businessman who needs to fly over for a super important meeting *tomorrow* will easily pay that much or more.

Or heck, someone whose mom back in their hometown was just hospitalized, and if you don’t go back *now* you may not get to say goodbye to her.

If you book a flight with such short notice it’s usually because it’s capital-I Important. And in that case, you’ll often pay whatever it takes to get on the flight.

And airlines make good use of that. They make a guess at how many of the super-expensive last-minute seats they’ll be able to sell, and then assign lower prices to the other seats. They may have several such pricing tiers, to try to fleece every passenger for as much as they’re willing to pay. You need to sell some seats cheaply because there aren’t enough people willing to pay the higher prices and it’s better than leaving those seats empty. Then there are people who’ll pay a middling price, people who’ll pay a reasonably high price, and people who’ll pay WHATEVER YOU ASK. So they try to make sure as many passengers as possible fall into the high-paying categories, and then fill up the remaining seats with cheapskates.

Imagine you go to the park with 10 popsicles that you plan on selling for 1 dollar each to make $10 dollars.

2 people offer you $2 for a popsicle, because they don’t know you were only going to charge $1. Now you’ve got 8 popsicles left.

Then you sell 6 more popsicles for $1 each.

The good news is that you made $10! The bad news is that 2 of your popsicles melted and you didn’t make any money off of them, and now they’re gone forever.

Next time, you might be willing to sell those last popsicles at $0.50 each, and would be happy to make any money off them and not let them go to waste.

Airlines figured out a long time ago that a seat on a flight is perishable.

Once the flight is over, that seat and any money you could have made from it is gone forever.

Airlines would rather make some money on every single seat, than have any seats perish without making any money. So they sell the best seats at the highest prices, then the moderate seats at moderate prices and then finally they sell any unsold seats for as much as they think they can get away with.

Airline tickets tend to get more expensive the closer to departure, they are sold at different price levels depending on advance purchase, or length of trip. It doesn’t apply to every route or airline, but typically there are 21, 14, 7 (and sometimes 3) day advance purchase rules on fares. So a ticket 4 weeks out might be $200 but 20 days out would be $300. Buying a ticket last-minute is typically the most expensive.

As you note, each airline has their own algorithm, and may even use different algorithms for different routes, and exactly how they calculate it is generally a trade secret.

One very simple idea is to set the price based on the number of seats remaining. When you get really close to a flight, they you likely want to drop the price as an empty seat brings in nothing. What decides if you are “close to” a flight will vary: business travelers tend to purchase last minute, while tourists tend to purchase early. They are likely to also mix in historical data for any given route., especially for the initial pricing.

People will pay the really high prices. $1,500 is cheap if your flight will make the difference between getting a $10,000,000 deal and not getting it. Somebody might also take it to see a loved one that suddenly got much sicker – flying today or tomorrow may make the difference between being able to say goodbye or not.

Airlines employ teams of people called Revenue Management. Their job is to figure out, not what a flight is worth, but what you are willing to pay for it. There are many factors that go into what you are willing to pay: your need for that particular flight (could you possibly take a cheaper flight a different day, or to a different airport?); how many seats are available (is it the last seat, or is the flight half-empty?); how great is your need to take this flight (is it a want or a need?).

But, don’t assume that it is some complicated algorithm. In my job I have worked with Revenue Management closely, and often the answer is “Well, that route is going for $700 on KAYAK right now, so quote that.”

Travel Agent here

Tl;dr if everyone tries to buy the cheapest ticket then first ticket sold is cheapest, last ticket on a plane is the most expensive. Some people choose to book a more expensive ticket right away so it’s not a hard rule.

The airlines are a bit hush about their exact algorithms but basically the way they work is based on having a whole bunch of different fare levels/bands.

If you have an empty plane and it is very far from travel (prices tend to be released 10 months in advance or so of the flight) then you can get the cheapest fare band available and some level of early bird discount may be involved as well.

There might be 10-50 or however many seats available at that lowest fare on that particular flight before it sells out and only the next cheapest seats are now available. Depends on the airline and how big the plane is etc.

As departure gets even closer more fares may disappear even if they haven’t been sold, leaving slightly more expensive tickets as the baseline.
This happens in quite a consistent way, as a travel agent we can see (if we care to research it) when certain fares will expire ie. when the prices will jump up for a certain flight.
It might be the same fare band available but because you missed booking by a certain date you are now buying class X(-10%) instead of X(-20%) that was available yesterday.
If all the X-20% fares had already sold out then you would have moved up to X-10% anyway based on availability. So it is time and availability that affect prices.
This is also why we refer to them as fare bands because within a band there is certain movement and availability, it’s not all just the one price. Buy that band will generally share the same change/cancel fees etc.

Combining these things you have flights that sell out early where the most expensive seat sold is a certain price. However if that final seat doesn’t get sold untill right before departure it can be even more expensive again because the fare bands are restricted as the flight approaches on top of the fact that there aren’t many tickets available so you are buying the creme de la creme.

Lower fare bands (and discounted tickets) will generally have higher change and cancel fees. The final seats although being the most expensive will generally allow free changes (airlines charge fare difference + change fee but with an expensive ticket you probably won’t need to pay fare difference due to the high fare you have paid already and also might have $0 change fee)

This all applies per cabin as well but you can also think of premium economy and business/first class as just being higher and higher fare bands that come with bigger seats and more inclusions instead of just better change fees.

In the long term you are very elastic. You have tons of options and can take your time picking whatever you’d like, whenever you’d like, however you’d like.

On the other hand though, you are very inelastic in the short term. Say a loved one died or you have an important meeting tomorrow or you need to close some sort of business deal asap.
You wouldn’t care about the price. You’d just want to get to your destination and airlines take advantage of that.

Like another commenter said though, they may lower the price a ton at the very very last minute to get anyone onboard. Because an empty seat is just lost money.

Edit: this is just based on my understanding of PED, and not actual IRL experience.

I used to travel a lot as a consultant… I probably flew 2-3 times per week for a few years.

There are certain destinations from my home city that’s maybe 99% filled with business travelers on certain days (e.g., Sunday and Thursday evenings).

The tickets are normally like $350 round-trip but on those days they’re always like $1800+.

Often business travelers must fly on certain days of the week, and many companies mandate buying “fully refundable” tickets due to frequent schedule changes. Airlines know this and price their tickets according to the demand.

Price doesn’t matter so much for businesses because the costs get passed on to clients and/or budgeted as a business expense for tax purposes.

This practice is called [Yield Management](https://drifttravel.com/understanding-airline-yield-management-getting-deal/) and airlines have some very sophisticated algorithms to maximize their revenue per seat.