Executive Travel : A Fare Rationale : Many Variables Go Into Setting Plane Ticket Prices
The $215 round-trip fare looks good. You call the airline but discover that seats are no longer available at that price. You can buy a ticket for $274. Or you might call back next week and find the $215 fare available after all.
Confused? Blame it on technology, and the airlines’ desire to squeeze the most money out of each flight.
On thousands of flights every day, huge computer systems continuously crunch numbers to help carriers figure out how many tickets to sell at which price and how many to overbook.
The trick for the airlines in allocating fares and seats is to make sure they don’t get too greedy and that they don’t sell too cheaply.
“It’s not a case of gouging the consumer. It’s a case of managing the product,” said Kenneth R. Stephens, president and chief executive of Behavioristics Inc., a small College Park, Md., company that provides software for USAir Group’s revenue management program. “Just by selling the seats a little smarter, USAir saved $140 million last year,” he said.
Pioneered by American Airlines nearly two decades ago, revenue management techniques have been adopted by a wide range of industries, including long-distance telephone carriers, cruise ship lines, hotels, even opera companies.
In the airline industry, where profit margins are paper-thin even in the best of times, the tool is critical, saving the nation’s airlines hundreds of millions of dollars each year. Indeed, some analysts believe USAir’s lag in developing a sophisticated revenue management system is partly to blame for its huge losses since 1988.
“This is the airlines’ main tool for optimizing their revenues,” said Jon F. Ash, managing director of Global Aviation Associates, a Washington aviation consultant firm. “Absent a yield management system, you forfeit the ability to maximize revenues.”
Airlines need to sell as many seats as they can, all the time. But they try to fill the plane with the greatest number of high-paying passengers before freeing seats to those who pay less.
“People may find it frustrating to call one day and get one fare, then another fare another day,” said Rocky B. Wiggins, USAir’s senior director of inventory management. “They say, ‘The airline is playing games with me.’ But in order to make money, we have to have a mix on the plane.”
As a result, passengers on the same flight can pay six or more different fares. And for many consumers, that’s perplexing.
“Some of the savvy travelers understand, but most people don’t,” said B.J. Cook, assistant manager at Roland Park Travel in Baltimore. She taps the keyboard on her computer terminal, searching for the best deal from Baltimore to Atlanta on Oct. 23. An array of 13 fare categories darts across the screen, ranging from $219 to $813 for a seat on the same Boeing 737.
What Cook doesn’t see is how many seats are available at any given fare. That information is closely guarded by every airline and available only to insiders, such as reservation agents.
Bookings change from day to day, even hour to hour. Typically, airlines will free more discount seats closer to departure if the plane is undersold.
Confusing or not, airlines don’t give up discount seats frivolously.
“You sell too many lower-fare levels, you don’t make money,” Wiggins said. “You don’t meet your costs and you’ve taken up seats that last-minute, high paying passengers might need.”
Without yield management, he says, prices would be much higher. “The system really benefits the traveling public to a great degree . . . It allows the airlines to offer more cheap seats with confidence.”
Typically, the least expensive tickets carry the most restrictions--such as advance purchase requirements and no refunds. Passengers pay a premium to get tickets with no strings.
The staggering number of daily flights--20,000 nationwide--also shows why effective revenue management can be so lucrative.
“You can add one passenger per airline and make a huge difference in revenue,” said Richard D. Niggley, executive vice president for Aeronomics Inc., an Atlanta-based company that provides yield-management systems for companies around the world.
Each flight has historical patterns and variables--such as time of day, day of week, origin and destination--that influence demand.
Three hundred days before a flight departs, USAir’s revenue management system, known as Excalibur, begins to track the flight. It starts with a bank of historical data on that flight. Before it actually takes off, Excalibur will review the flight 45 times.
“Closer to departure, those review points get closer and closer together,” USAir’s Wiggins says.
Every night, between midnight and 3 a.m., new information, gleaned from the reservation system, is fed into the system. The so-called adaptive neural network processes the new data and revises its predictions.
But the computer is only part of what goes into forecasting flight demand.
At USAir’s marketing services office in Winston-Salem, N.C., 70 revenue analysts assigned to geographical areas constantly review Excalibur’s predictions. It can’t, for instance, take into account a tropical storm off the coast.
The systems also track what other airlines are doing. An unanticipated fare sale by a competitor can leave an airline with a half-empty plane unless its own fares are adjusted.
By examining the history of no-shows on every flight, airlines also decide how much to overbook a flight to minimize loss of revenue. The percentage of overbooking varies from flight to flight.
With the power of computers--and generations of technology to come--revenue management techniques may someday allow consumers to bargain with the airlines for a fare.
