There’s a method behind the madness, though.
It’s called airline revenue management: the science of adjusting fares dynamically and in real time so that airlines can maximize their revenue.
And it’s not just a case of simple supply and demand.
Airlines now rely on ever-more sophisticated software that takes into account a broad range of factors, from overall conditions across their global networks, right down to the individual preferences of their passengers.
It hasn’t always been like this.
For most of aviation history, airlines operated in a tightly regulated, uncompetitive environment, where air fares usually cost a small fortune.
Discounted tickets weren’t unheard of, but usually came with lots of strings attached, such as having to spend a certain number of nights at the destination.
International routes were usually operated by the flag carriers of the countries involved, who would take a gentlemanly approach to competition and fare-setting.
Deregulation — a global liberalization trend which began with the US Deregulation Act of 1978 — swept everything before it, from the industry structure to the way we think about air travel and airline fares.
It’s now all about revenue management, says Robert W. Mann, a consultant and former airline planning executive.
And that’s something, he says, has become increasingly complex and fiercely competitive in the past few decades.
“The growth of the network airline and the drop in the cost of computing has brought revenue management to whole new levels of sophistication,” he tells CNN.
“Techniques such as Expected Marginal Seat Revenue (EMSR) look at the best ways to optimize fares in real time, not only on a given route, but taking into account revenue-generating opportunities across the whole airline network”.
This is why, for example, flying from London to Dubai may cost pretty much the same as flying all the way to Manila, also via Dubai.
That’s because the airline may prefer to keep seats on the London-Dubai leg for higher-value passengers that fly longer onward journeys, and will use pricing to discourage those aiming to fly shorter trips.
But how does the airline know who the higher-value passengers are and how much to charge them?
Stuart Barwood, founder of Travercial, an airline consultancy firm, says airlines can make a number of reasonable assumptions about the profile of traffic on a certain route and then adjust their prices
“The London to Majorca route, for example, has a marked leisure profile. This has implications not only for fare levels but also for the way pricing changes over time.
“If the airline assumes that leisure passengers will tend to book relatively early, months before their holidays, it may be tempted to start pricing seats on that route relatively high. It would then adjust them according to the market response.
“Meanwhile on a typical business route — let’s say London to Frankfurt — the airline may start with low prices to fill a minimum of capacity, then raise prices steeply for business travelers that book at the last minute.”
In fact, those last-minute high-value passengers are so precious that some airlines go the extra mile to make room for them.
For example, a service developed by Barcelona-based company Caravelo helps airlines identify those passengers most likely to accept a flight swap in exchange for compensation, such as vouchers or frequent flier miles, and offers to rebook them on a later flight.
With space then cleared, the high-fare passengers are then booked onto the previously full flight.
Towards total customization
You might think of fare classes in terms of economy, business and first class, but the reality is airlines have dozens of subdivisions.
The airline will adjust the number of seats allocated to each fare class. When one class has been sold, the sale price will leap to the next one.
This is how most fares are currently set, but it’s still some way off from the ultimate goal: Airlines want to know their clients so well they’re able to offer fully personalized pricing.
Loyalty programs, registered users and cookie tracking can give airlines some valuable clues, but even when an airline has gathered a lot of data about its passengers they still might not be putting it to profitable use.
Adding up the extras
“In reality, it is quite common for passenger data to be scattered throughout several functional areas within an airline, kept in data silos where it is of little use to the revenue management department,” says Barwood.
Airlines might be lagging behind the likes of Amazon when it comes to personalized marketing, but Barwood says many are getting up to speed with data management and this is already being felt in pricing and marketing.
Revenue management systems will increasingly take into account not only the air fare itself, but the total value a passenger can generate for the airline, including ancillary revenue.
That’s all the extras that can be added to your base fare, and it’s a
growing source of profit.
Using seat choice as an example, many airlines now charge for the privilege of picking your seats in advance.
This could, in theory, be managed dynamically. Why not base seat prices on the occupancy of a given flight? Or charge less to members of your loyalty program?
This kind of profiling might be beneficial to the loyalty program customer in this instance, but what about when a frequent business traveler is then consistently shown higher fares when they’re trying to book a family vacation?
It could well prompt a backlash among the sort of high value customers that every airline hopes to retain.