How do airlines price tickets? | CNBC Explains

Summary

The video script explores the complex world of airline ticket pricing, driven by dynamic pricing and AI. It traces the history from regulated markets to deregulation, leading to competitive pricing. The script delves into how airlines use revenue management strategies and algorithms to maximize profits, factoring in demand, capacity, and customer profiles. It also discusses the impact of consumer behavior and the role of AI in both airlines' pricing strategies and consumers' search for the best deals.

Takeaways

• 🛫 Buying plane tickets can be confusing due to the dynamic pricing system that seems random but is actually based on AI and market factors.
• 📈 Dynamic pricing is influenced by artificial intelligence rather than just the cost of flying, aiming to maximize airline revenue.
• ✈️ The first scheduled flight was operated by British Overseas Airways Corp. with the Comet, marking the beginning of commercial aviation.
• 📊 Initially, airfares were regulated and based on distance, but deregulation in the 1970s and 1980s led to more competitive pricing based on demand.
• 🌏 Deregulation spread globally in the 1990s, but it also led to a few dominant airlines controlling a large portion of the market, affecting pricing power.
• 📉 Despite increased competition, ticket prices have fallen between major hubs, but less competitive routes have seen higher average fares due to reduced flights.
• 🚀 The demand for air travel has grown significantly, with nearly 1.8 billion more passengers in the last decade, impacting ticket pricing strategies.
• 💺 Airlines use revenue management strategies to set ticket prices in real-time, considering factors like network status, capacity, and demand.
• 🔢 Algorithms adjust fares based on past bookings, remaining seats, route demand, and the likelihood of selling more seats at a higher price later.
• 🔄 Pricing for connecting flights can be higher for shorter segments if the airline wants to reserve seats for longer, more profitable routes.
• 🏖 Leisure travelers are often charged higher initial prices and see adjustments based on market response, while business travelers pay more for last-minute bookings due to less price sensitivity.
• 💼 Airlines may use consumer data, such as browser cookies, to personalize pricing, although this practice is disputed and not proven.
• 🛒 Consumers can use fare monitoring sites with algorithms to predict the best time to buy tickets, creating a counterbalance to airline pricing strategies.
• 🤖 The role of AI in airfare pricing is significant and likely to continue as airlines manage increasing passenger volumes and consumer demands for better options.

Q & A

What is the concept of dynamic pricing in the context of air travel?

Dynamic pricing in air travel refers to the use of artificial intelligence to adjust airfare prices in real time, taking into account a variety of factors such as passenger demand, flight availability, and booking history, rather than just the cost of the flight.

How did the commercial aviation market change after deregulation?

After deregulation, the commercial aviation market became more competitive, with pricing based on market forces rather than government control. This led to lower ticket prices on major routes but potentially higher prices for less competitive routes due to reduced competition.

What was the impact of the 1978 deregulation in the U.S. on the aviation industry?

The 1978 deregulation in the U.S. removed government controls over routes and market entry for new airlines, leading to more competition, lower fares on major routes, and a shift in the industry from a regulated to an unregulated market.

Why might longer flights sometimes cost less than shorter ones?

Longer flights might cost less than shorter ones due to dynamic pricing strategies used by airlines. For example, if a longer flight is part of a connecting route with higher demand, the airline may price the longer route lower to ensure seats are filled for the full journey.

How do airlines use algorithms to determine ticket prices?

Airlines use algorithms that analyze past bookings, remaining capacity, average demand for certain routes, and the probability of selling more seats later to adjust fares. These algorithms work in real time to maximize revenue and fill seats efficiently.

What is airline revenue management and what is its goal?

Airline revenue management is a strategy used by airlines to maximize their profits by dynamically pricing tickets based on various factors. Its goal is to make as much money as possible from each flight by filling seats at the highest possible prices.

How do airlines differentiate between leisure and business travelers when pricing tickets?

Airlines differentiate by profiling their customers and placing them into leisure or business groups. Leisure travelers are often charged higher prices initially and the price is adjusted based on market response, while business travelers are offered lower initial prices that increase steeply for last-minute bookings due to their price insensitivity.

What is the 'basic economy fare' and why do airlines offer it?

The 'basic economy fare' is a lower-cost ticket option with limited amenities, designed to compete with low-cost carriers. Airlines offer this fare to attract price-sensitive customers and to ensure they appear on the first page of search engine results.

How do consumer websites use algorithms to help customers find the best flight deals?

Consumer websites use algorithms and past data to monitor fare changes and predict the lowest price a seat will reach. They then alert their customers to these deals, helping them find the best prices for their flights.

What was the controversy surrounding United Airlines and the website Skiplagged?

United Airlines sued the website Skiplagged, which helps passengers find loopholes for cheaper tickets, as it posed a threat to the airline's dynamic pricing system by revealing lower fares that could be found through connecting routes.

How has the growth in the number of airline passengers affected ticket pricing strategies?

The growth in the number of passengers has led to an increased use of complex algorithms by airlines to manage the higher volume of travelers and to cater to consumers' demands for better choices and easier booking processes.