How Airlines Price Flights


This video was made possible by Blue Apron. Get three free meals from Blue Apron by being
one of the first 100 people to sign up at the link below. Airline ticket pricing probably seems like
a crapshoot. The numbers change seemingly arbitrarily every
week, day, or hour, but there’s some real science behind these prices. People spend their whole lives figuring out
what to charge you to fly. Let’s take a look at one flight on one route
by one airline to understand. American Flight 33 leaves New York’s JFK
airport every day at 7 AM bound for Los Angeles arriving at 10:51 AM pacific time. This transcontinental route is one of the
most competitive in the world with over 3.5 million yearly passengers and five major airlines
connecting the country’s two largest cities. There’s nowhere where pricing strategies
are more important for airlines than here. Looking at three months of fares for this
flight, there are eight distinct prices for economy ranging from $129 to $472. These all get you on the exact same flight
in the exact same seat but each and every price has a purpose and place. The lowest price, $129, is the most competitive
price. This fare only shows up three times in our
three month span—each time on Tuesdays. Now, Tuesdays are very often the cheapest
days of the week to fly. Business travelers tend to make up much of
the demand during the week and they most often want to fly out on Monday and return on Thursday
or Friday so Mondays, Thursdays, and Fridays tend to be the most expensive travel days
while Tuesdays and Wednesdays are often the cheapest. The average ticket price for this flight shows
this—Tuesdays average $182 and Wednesdays $173. Even if the demand is lower American Airlines
runs the flight anyways and they have to fill seats to break even so they sell the flight
at rock-bottom prices. The next price, $144, actually demonstrates
a very interesting phenomenon. Whenever American prices their flight at $144,
they are not alone. Take March 6th for example. American, Delta, Virgin America, JetBlue,
and United all have flights from New York to LA at around 7 in the morning selling for
$144. They’re doing what is called price matching. Because this is one of the most competitive
routes in the world and because the number one determinant for travelers on which airline
they take is price, all five airlines flying this route match each others prices. This way, travelers make their decision based
off the reputation of each airline rather than the price. The price stays at $144 because it’s in
each airlines best interest to keep it there. In a normal market, if Delta, for example,
dropped their price to $119 they would get more travelers since they were the cheapest,
but in this price matched market all the other airlines would drop their prices as soon as
Delta drops theirs so all of them would get the same amount of travelers as before while
earning less money, but there are some cases where it can make business sense for airlines
to drop prices to below even being profitable. Around the year 2000, WestJet and the now
defunct CanJet airlines started flying from central Canada to Newfoundland. These routes were historically operated exclusively
by Air Canada and they were expensive. A one-way flight from Montreal in 1999 cost
over $600, but when the budget airlines WestJet and CanJet started flying the route, prices
dropped dramatically and Air Canada was threatened, so they dropped their prices even lower. The $600 Air Canada fares then cost $89. Now, it wouldn’t make sense for anyone to
fly a budget airline over Air Canada at the same price so WestJet and CanJet were almost
driven out of business on these routes, until Canada’s Competition Bureau stepped in. They concluded that Air Canada was engaging
in the uncompetitive action of predatory pricing since they were pricing flights below what
it cost to operate them, so they were forced to stop. Airlines in the US, with some newly strong
budget competitors, are engaging in similar actions nowadays. United airlines, for example, is matching
Frontier’s $40 fares on many days from Denver to Chicago, among other routes, in order to
maintain their market stronghold in Denver and Chicago even though their cost to operate
the route is drastically higher than Frontier so they are almost certainly loosing money
on those fares. But back to the New York to LA route. $159 is the lowest regular fare for this flight. The $129 and $144 price points were both basic
economy fares—the most restrictive type with no seat selection, no carry on bags,
and no changes or refunds. Every flight has a bunch of different booking
classes each with a fare code. For example, the basic economy fare code for
the $129 and $144 price is B, but the $159 price books into fare code N. These different
booking classes are sometimes known are fare buckets. Essentially the airline decides it’s going
to sell a certain number of tickets at the $159 price with fare code N, let’s say 10,
then when those ten tickets are sold the airline then sells economy at fare code G for $204
then when those are sold it sells economy at fare code V for $269 then fare code L for
$318 and so on and so forth. There are also some cases where a ticket will
default to a more expensive fare bucket because of reasons other than the lower fare selling
out. Many fares, including each mentioned so far,
have advance purchase requirements meaning that, even if a flight is not full at all,
the price will increase closer to departure. All the fares below $204 have an advance purchase
requirement of two weeks meaning that you can only purchase them more than two weeks
before departure while the $269 fare, for example, has an advance purchase requirement
of only one week. Although, the cheapest fare without an advance
purchase requirement at all, that is, the cheapest fare that you could buy day-of for
this flight is fare class K at $472 which happens to be the most expensive economy class
fare. And now for some caveats. Not every fare for this flight is going to
be priced at one of these eight prices. Airlines have mechanisms to adjust fares from
these buckets. In the short-term, they can adjust things
like the fuel surcharge to raise the price if other factors, like oil prices, increase. In the long term they can adjust the actual
prices of the different fare buckets. Airline often increase the base fares for
busy seasons like summer. American Airlines does exactly that on this
New York to LA route where their fare class M, for example, increases from $357 to $410
in August. But so far we’ve looked at this at a micro
level—how prices differ on one flight—but we also have to consider the macro level. Why if you leave on Tuesday February 6th and
fly 2,469 miles to the west to LA do you pay $129 while if you fly 3,442 miles to the east
to London—only a thousand miles further than LA—you pay $2,772. Well, the second figure is a bit deceptive
because that’s the price of a one-way ticket. If you switch the LA flight to a round-trip
ticket returning a week later it will cost $257—exactly double—while if you turn
the London flight into a round-trip returning a week later the price will drop to $602—almost
five times less. This is understandably confusing—a one-way
ticket that costs more than a roundtrip—but the reason this is goes back to the fare codes. Embedded within each fare code are a bunch
of little restrictions that dictate when you can use that fare. On the New York to LA trip those restrictions
are just things like blackout dates for the fare and advance purchase requirements, but
the New York to London ticket has loads more restrictions and the ones that make one-ways
more expensive than round-trips are the minimum stay requirements. These requirements dictate how soon your return
flight can be in order to get a particular fare. The idea is to price discriminate—business
travelers should pay more because they can pay more. Meanwhile, airlines try to give the lowest
prices to leisure travelers since they’re the ones paying for their own tickets and
therefore they’re the ones that are the most price sensitive. Business travelers often want to be home for
the weekend, so many of these minimum stay requirements, like with fares Q, N, and S,
just require a Sunday at your destination. Others, trying to accomplish the same thing,
require seven days, a full week, which would also require a traveller to stay the weekend
at their destination. Now as the prices go up the requirements go
down so once you get to paying around $2000 you can stay for as few as three days, but
the cheapest roundtrip base airfare with no stay requirement at all is $5,544 in fare
class Y—exactly double the one way price. So that explains this—the one way ticket
is so expensive because, since the airline doesn’t know how long the traveller will
stay at their destination the one-way fare has to be booked into the least restrictive
fare class without the minimum stay requirement. You’ll see this idea of price discrimination
all over ticketing structures. It’s a genius pricing concept that allows
different people to buy products at the prices they can afford and therefore its allows businesses
to sell the same product to more people. Tickets increase in price closer to departure
because leisure travelers buy tickets far-out and business travelers buy their tickets close
to departure and flexible tickets are more expensive because that’s what business travelers
need, but there’s another pricing difference going on that’s less fair—between routes. It’s all about competition. Different routes of the same distance cost
different amounts generally not because they cost different amounts to operate, but because
of how much the competitors are charging. This is part of why flights into small airports
are so expensive—because they lack competition. You can fly the 240 miles from Detroit to
Pellston, Michigan on a CRJ 200 for $242 or you can fly the 170 miles from Detroit to
South Bend, Indiana on a CRJ 200 for $76. The only difference is that South Bend Airport
has flights from United, Delta, and Allegiant while Pellston only has flights from Delta. The same phenomenon happens over the Atlantic. There’s more competition on the six hour
flight from New York to LA than on the six hour flight from New York to Dublin so you
can fly to LA for $250 round trip while Dublin costs $500 round trip. Of course, travelers from New York to LA can
drive, take the bus, take the train, or take a flight connecting halfway there while travelers
to Dublin only have one choice—to fly. In all, the truth is that prices reflect what
people will pay and so people will pay what flights are priced. If you’re a busy person like me, you know
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100 thoughts on “How Airlines Price Flights

  1. I like the regional and contemporary ease of smaller airports, it is easier for parking and getting in and out of the airport. If you have every flown into TUS, you'd understand what I mean, it is a big and small airport at the same time. When I first saw ORD it was like, wow this is a big and confusing airport! One way I think that smaller airports can survive is to sell an affordable contemporary atmosphere with friendly competitive airlines. The less rivalry the more safety focused and customer are much more likely to want to cooperate as friendly flyers 🙂

  2. I don't understand one thing and this is just one 1example a fligth from manchester to dar es salaam via Istanbul (Turkish airline ). Is cheaper then me catching a plane from Istanbul to dar es salaam m, same fligth same time and day, I even notice with eithad for example it cheaper for me to fly in to dubia them Abu dubia it self, that mean landing in Abu dubia, them transfering to dubia

  3. thanks for the great video. another puzzling thing for me is every time i use Kayak or Momondo to search flight prices, i hardly ever get prices directly from the main airline itself, rather so many online travel agents are on the list who are way cheaper than airline itself. How does that work?

  4. Ok, the airplane is like the rotary telephone. It should no longer cost alot to fly anywhere. You can travel from Des Moines Iowa to Phoenix Arizona for $39.

  5. Who on earth said I wanna be on air Canada I know I would chose anything other such as, WestJet, Air Transat and Sun Wing they are al great from first hand experience

  6. Yup, not only are smaller cities/airports more expensive because there is less airline competition, but plane seats to those cities are also scarce, due to far less flights coming in and out of them. Supply and demand baby. I just flew into a regional airport in Illinois on a regional jet from Chicago, and it was FAR more expensive than if I were to fly to St. Louis, which is further from Chicago. Hell, even flying to Dallas or D.C. would have been around the same price or less. Another factor that makes these regional airport flights pricier is the fact that the planes are smaller, and overall that's better than being on a giant plane packed with more people (especially when it comes to boarding and de-boarding).

  7. What about Taxes? Airport charges? Oil prices? They cost in some countries up to 70% of the ticket price. It's not about competition only.

  8. My family is planning to go home to the philippines from Edmonton, Canads on december 10, 2019, and the prices are Really Expensive, so the cheapest was $1377 Cad (Roundtrip with 2 stops) . Or $1,031 Usd. Per person, and there are 4 of us..

  9. Meanwhile in Europe a flight of similar distance (Sofia – London Liton) USUALLY costs about $60 thanks to Wizz Air and Ryan Air.

  10. It also depends on where you buy your ticket at. on Norwegian they have three options for English: American English, British English, and all other English. You can save up to $40 to $50 a ticket if you go to other English, but you're still buying from the same airport to the same airport.

  11. Excellent video, but I feel that you're missing one important point about the cost of flying international, which are taxes and international tax etc.

  12. there are many things u didn't say in this video, I was a ticketing officer and you forgot staff tickets and 7 day or 3 month or 12 month validies ex. if you book a return more than 7 days the price will be cheaper. and the validity of the ticket can be 3 months or 6 month or12 months. and you forgot to mention ZED fares and 50% with seats and 90% tickets without seats. and last minute flights, for example zed fares uses miles instead of daily price changes. with zed fares and 90% fares u fly exact same price anytime during the year. you also forgot surcharge if buying from the ticketing office. that's why online prices are cheaper and not refundable and you also forgot re issue fees and airport taxes additional payments . u missed a lot in this video. but good job

  13. Oh boy, I see some big desruption potential with those pricy routs.
    Just proofs, that the market needs competition…

  14. If possible pls make video of Delhi to Mumbai route total operational cost of budget carrier flight eg: fuel cost in ltr, crew cost airport charges etc

  15. What stops you from purchasing two pairs of round trip tickets (one JFK-LHR and the other LHR-JFK), bypassing the minimum stay requirements? I mean, Airline A won't check Airline B's systems to see whether you came back to New York immediately, and (assuming you are a US citizen), you will get an extra departure and arrival scan in your passport. Customs will know, but the gate agent won't be checking every single passport page by page for extra stamps. If you're an EU citizen and flying to Schengen countries, this is foolproof because they won't stamp you at all.

  16. Have you seen Blue Apron's share price?? It has fallen by almost 90% since its IPO. Something is not quite right there.

  17. I always wondered of Manhattan Regional Airport in Manhattan, Kansas. They have a two-terminal airport, but only have American Airlines as their airline (plus some charter airplanes). Tickets are so freaking expensive. Whenever I could, I would just drive two hours to Kansas City and fly out with Southwest Airlines.

  18. Hold on…If a one-way ticket costs nearly $1500 more than a full round trip, couldn’t you just book a round trip and simply not go on your returning flight?

  19. Fly Norwegian and you will not regret it. They have the most attractive prices – just bring your own food.

  20. wait– but if a one way ticket is more than double a round way ticket why wouldn't you just get the round trip and just not go on it????

  21. I want A Round Trip Ticket, FROM Indianapolis AIRPORT Indiana, TO Albuquerque International airport, The Date, June 14th TO June 30th. Starting Biting…

  22. Kayak is showing a flight from NY to Sacramento in Feb. when school is out, has two seats left. Is that always real? Or do airlines hold some fare buckets? The flights are almost $500 right now. I thought the best time to buy domestic is usually a month in advance. How can that be if all the fares for lower buckets go first?

  23. 7:39.. To the clever passenger. Forget the one-way tickets. Even if you dont need the return ticket, get the round trip tickets instead of oneways. Thus you save money. I have done that several times. I just dont show up on the return flight…. 😀

  24. Tuesday is the cheapest day?
    Now it makes sense why i went on vacation on a tuesday or not any othet day..

  25. Forget about the fares for flights being the purest form of capitalism (buyer beware) the American sales model of charge as much as the market can stand (for market see people) no one minds price differences however the OBVIOUSE gouging done by air travel, train travel even bus travel are great in the short term. But.. people are seeing the pricing and some journeys you have no choice if you NEED to travel on a Monday well you pay the price however the much vaunted "competition" should in a free market balance at least a bit. But that would work were it not for agreements by airlines, and simple monopolies on certain routes.a perfect example was after the last crash, several very large travel companies in Europe merged they immediately found due to these mergers the had a monopoly on flights to certain destinations and what happened GREED within a month or two these routs "doubled" holiday and flight prices doubled?   Personally that mindset is ultimately self destructive as these Hugh companies are normally harder to react when things change (especially after making money over several years, why worry we have done great..)

  26. When they start charging kids as kids instead of a full adult ticket! I'll fly again..until then if I'll rather drive

  27. I work for a far large company operating in most countries in the world 😀 We book the lowest price tickets for us and for our employees to keep frugal 😀 It is far cheaper to give someone 2-3 more days paid without work in destination then pay a 3000 ticket 😀

  28. Instead of the expensive ticket from New York to Dublin you could travel from New York to London and then from London to Dublin

  29. I live in Canada and air canada is the worst airline ever. Always delayed, usually overbooked and loses your luggage. Fly westjet people

  30. So if i want to move from New York to London i would get the 600$ round trip ticket and never return because its cheaper to pay 600$ for a round trip than 5000++$ for a one way trip

  31. Hmmm this is interesting. If all airlines chose to charge $144.00 for the same flight wouldn't that be illegal price fixing. It gives the customer no option but to buy. There is a clause that states that its legal if they didn't agree with their competitors on this but its clearly very obvious that they did.

  32. You forgot to mention, the tracking cookies that we must accept. They track us and if we search a certain route multiple times the price will not decrease but the opposite.

  33. The explanation of why a one way ticket is more expensive based on the minimum stay requirements does not make sense. He says "because the airline does not know how long the pax is going to stay at the destination, it falls into the highest price category". The whole point is to price cheaper for leisure travelers. But flying one-way does not identify you neither as business nor as leisure traveler. Business and leisure tend to book return tickets, so this criteria is not discriminating. So there must be another cause for the high price of one-way tickets.

  34. Blue Apron? how much do they pay, to be sent organic food? i hope its organic; if its suppose to be healthy. organic can mean an extra trip, but its not that hard to obtain anymore. You have to be absurdly busy, to have your meals shipped half way around the world for you; what a luxury. I mean, meals are everyday. And, you pay for each one, I guess; even if sent in bulk.

  35. that concept about one way being more expensive than return is just dumb. if u were a passenger, you would pay for a return flight to london and come back the next day with a different return ticket so less than half of the one way.

  36. In Canada, it cost $300 from Edmonton to Toronto one way. And if your flying from US to europe, it only cost $380 Round trip.

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