Tales From the Ticket Counter – Fare Game
On January 16th, I mentioned the Yield Management (or something to that effect) Department that all airlines have. The purpose of that department is create fare structures that completely baffle the flying public and cause headaches the world over. Well, maybe that’s not their stated purpose. Maybe, that’s just a bonus.
We’ve all done it. We’ve bought a ticket for roughly the equivalent of our mortgage, boarded the plane and sat next to someone who paid more for their shoes than for their ticket – and they’re not even good shoes. How does that happen?! You expect some price variations in all purchases, but ticket prices vary so wildly, there seems to be no logic in them at all. Upon closer inspection, we find that there may not be any logic.
At the ticket counter, we knew that seats were sold based on supply and demand in “inventory buckets.” When a flight was initially listed, the supply of seats was high, therefore the seat prices were lower. As seats were sold, the supply decreased making each seat worth more. I checked with a friend who once worked worked in Yield Management to help me explain the process. He explained inventory buckets by saying that they are “like an ice tray held at an angle to the counter. Pour water into the highest chambers and when they’re full, the water flows over into the next. Same with the least expensive fares. As they sell out, availability kicks up into the next more expensive inventory and so on. This changes somewhat as the departure date nears; a carrier may close out lower inventories whether they’re sold out or not, if historical data shows the seats will sell at a higher fare. It gets a lot more complicated though; for example, take a DFW-AUS (Dallas to Austin, Texas) trip. (The airline) may close out all *local* DFW-AUS availability (i.e. people wanting to buy a ticket just from DFW to AUS) even if there’s demand, if the historical data shows they’ll sell the remaining seats to customers connecting off a long-haul through DFW to AUS. Going the other direction, say the flight’s routing is AUS-DFW-SEA (Austin to Dallas to Seattle), they may not sell a seat out of AUS to SEA if they think they’ll get a MIA-DFW-SEA (Miami to Dallas to Seattle) customer at a higher fare.” He went on to say, “I truly believe it ultimately gets so complex that even the people in charge don’t really understand all the nuances.”
During the expansion of point-to-point, short-haul carriers like Southwest and AirTran (then ValuJet) in the 1990s, many frequent travelers began to suspect that rates were not based on actual costs, but, rather, on what everyone else was charging. I was working as a travel agent in Jackson, Mississippi, at the time and I had clients that regularly traveled between Jackson and Atlanta, Georgia. Their Delta Air Lines mid-week travel tickets cost in the neighborhood of $650.00. ValuJet came riding into town with a much lower operating cost and sold those same seats for about $150.oo. Delta matched the fare. Did their the operating costs drop $500 per seat overnight? Certainly, not. However, because ValuJet could profitably sell the seats at that lower cost, what dropped $500 overnight was what the market would bear.
So, then, are fares based on actual costs at all? When I asked my friend, his response surprised even me. He said, “Costs are not part of the equation. In fact, we were told that cost data was deliberately kept separate to avoid having it influence fare levels. In my opinion, this is one of the major problems in the airline industry today.” This is like spending $750,000 to build a house, then selling the house for $500,000 because that is the most anyone will pay for it. And it’s like doing that hundreds of times every single day. We’re not surprised, then, to hear that air mass-transit has lost $60 billion in the last nine years or that they’ve terminated employee pension funds. What surprises us is that they’re still in business at all.
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