How do airlines set prices for airfare?

Airfare Question of the Month
by , SmarterTravel Staff
Jessica Labrencis Headshot 200706
Photo: iStockphoto
Editor's Note: This story was originally published on December 6, 2007. To see the most recent SmarterTravel articles on related topics, please click on any of the following links: airfare, Airfare Question of the Month, AirTran, Jessica Labrencis, JetBlue, Kayak, low-cost airline, Southwest, United, Virgin America.

Dear Jessica,

What criteria do airlines use in setting prices? Does it make sense that a direct flight from Philadelphia to New Orleans on United is cheaper than a direct flight from Chicago (O'Hare) to New Orleans?

--V.G.

Dear V.G.,

Great question. Prices for airfare often seem to defy all reason, and many readers have submitted questions similar to yours over the years.

Advertisement

"Airline pricing is a combination of art and science," says Keith Melnick, executive vice president of corporate development at Kayak. "The simple goal of airline pricing is to make as much money as possible on each flight.... There are two things that come together to determine this: how many seats are sold and how much money you can get for each seat. Airlines try to maximize each of these variables by predicting demand," says Melnick, demand from both high-paying business travelers and leisure travelers looking for a cheap flight.

Melnick says that for a 100-person flight, an airline may reserve 40 seats for business travelers who book late and expect to pay high prices. It offers the remaining 60 seats at a cheaper price until business travelers begin to book, and once those cheap seats are gone, they're gone. "The price you see when you buy a flight is based on the demand an airline expects for a flight, and what that demand actually looks like," says Melnick.

According to JetBlue spokesman Sebastian White, there isn't a hard and fast rule for how airlines set prices for airfare. "If there isn't any nonstop service in the market, a carrier might calculate costs and then add a profit margin to come up with a fare structure that would generate the expected mix and average fare," White says. Or, a carrier might base its prices for one route on a market of similar length.

The presence of low-fare carriers like JetBlue, Southwest, AirTran, or Virgin America also affects airfare prices. "Many times if there is a low-fare competitor in the market, then the carrier simply has to match that mix of fares. It's rare that carriers do not have a competitive fare structure in the same market," says White.

In the case you mention, Melnick says it makes complete sense. "From a pricing perspective, those flights have nothing to do with each other.... Think of them as two completely separate products in the grocery store, frozen pizza and eggs. The price of eggs has nothing to do with the price of frozen pizza."

 
 
Read comments or add your own insight!
Please enable JavaScript to properly view and use this web site.