You often see promotions for what seem to be unrealistically low airfares. And if you think what we see here in the U.S. is bad, try Europe, where airlines occasionally highlight fares as low as £1, €1, or even “free.” If you’re confused, you’re not alone.
I recently received these questions: “What’s behind airline marketing? Given the recent sales—$2 fares from Spirit and Ryanair‘s free flights—how can airlines afford to offer such seemingly outrageous prices? What’s the business model, and does this really benefit consumers. Can they really get these fares? What are the caveats?”
The quick answers are straightforward:
- Airlines can afford to offer such seemingly outrageous prices because they apply to no more than around 10 percent of the seats, and because they sell the other 90 percent of the seats at much higher prices.
- Super-low fares do really benefit consumers, at least those who play the airlines’ game skillfully.
- Consumers really can get these fares, at least in the U.S.
- The caveats are limited supply and possibly some restrictive “fences.”
The business models
Although details differ, almost all airlines share a basic business model. They sell the same product to different customer groups at different prices—prices that reflect the differing values of air travel to those disparate customer groups. The complications arise in the techniques they use to discriminate their fares.
- All airlines’ business models are based on a well documented economic principle that they can sell more seats—and generate more profit—by selling some seats at low prices and others at high prices than by selling all the seats at the same average price.
- The legacy lines add a second principle. They have optimized their systems to meet the needs of business travelers, from whom they demand top-dollar fares. Revenue from low-fare “fill up” leisure travelers can be almost pure gravy, as long as the airlines can keep the business travelers out of the cheap seats.
Whatever systems an airline uses to set its fares, the overall objective is to generate the highest possible average per-seat revenue. The process of trying to meet that objective is called “yield management.”
One of the simplest forms of yield management is called “capacity control.” On each flight, an airline allocates the total number of seats into several different fare “buckets.” The first seats sold initially come from the lowest bucket. When that bucket is empty, subsequent travelers must buy from the next higher bucket, and so on up the line, until the last seats sell at the highest possible bucket.
Airlines often reallocate seats on each flight among the fare buckets, depending on the rate of sale. If the cheap seats seem to be going quickly, they bump some of the remaining seats into higher buckets. If sales are slow, they make more cheap seats available.
The other simple approach to yield management is peak/off-peak pricing. Many airlines vary their prices depending on (1) season, (2) day of the week, and (3) time of day. Sometimes they vary list prices; sometimes they just adjust the number of seats in various fare buckets.
Many low-fare lines use nothing beyond capacity control and peak/off-peak as their yield management tools. But even the legacy lines’ more complex yield management systems employ a big dollop of capacity control and peak/off-peak.
In simple capacity control systems, some business travelers find it relatively easy to take advantage of the lower fare buckets. To prevent “leakage” of those travelers from the higher fare levels, legacy lines historically added “fences” to their lowest fares—artificial restrictions designed to make them unattractive to business travelers:
- Because most business travelers want to be home weekends, airlines added mandatory round-trip and Saturday-night-stay
- Because many business travelers make last-minute travel arrangements, they added advance-purchase.
- Because business travelers need flexibility to change flight dates and times, they added non-refundability.
This system worked for several decades, to the point that unrestricted business fares averaged something like four to five times the most restricted leisure fares. The low-fare lines, however, changed all that. By not using fences on their own fares, they forced the legacy lines to abandon or weaken their own fences. The airline financial squeeze in the early part of this decade was due on no small part to the inability of the legacy lines to maintain the wide gap between leisure and business fares. Although they still employ fences, they do so in fewer situations, and rely increasingly on capacity control.
Beyond their published offerings, many airlines also add a separate low-fare bucket accessible only by discount agencies—consolidators—who mark the fares up for sale to the public. Even when regular leisure fares entail lots of fences, the consolidator bucket is generally limited just by capacity.
Consolidators are mainly important for international travel, but some domestic legacy lines use them, too. As an alternative to consolidators, some domestic airlines offer relatively unrestricted low fares through opaque outlets Hotwire and Priceline.
Bait and switch?
One way an airline could advertise a rock-bottom price is a bait and switch. Advertise a fare of $10, say, but offer only one seat at that price. When the U.S. Department of Transportation (DOT) suspected bait and switch in airline advertising, however, it adopted rules that required an airline to provide an “adequate” number of seats at any fare it advertised. Although the DOT never set an exact standard, it made clear that 10 percent would be adequate. As a result, for example, when Skybus promises $10 seats, the DOT requires that it start out with around 10 percent of its seats in that fare bucket.
Unfortunately, consumers in foreign countries don’t yet have that protection. But government agencies in other countries do police bait and switch advertising, and some are considering tougher requirements.
The other way an airline can advertise seats for $10 or less—or even give them away—is to add extra surcharges and fees that they don’t include in the posted prices. During the first of the several oil crises in recent decades, some airlines started to add “fuel surcharges” that they left out of the advertised prices. “No, you don’t,” said the DOT, which ruled the only fees and charges airlines could omit from their featured fares were per-user fees collected in behalf of government bodies and airports. Thus, U.S. airlines can’t use split prices. (Parenthetically, many hotels and tour operators not under DOT regulation routinely do split prices—a major scam.)
Foreign governments generally don’t regulate split pricing. So when a European airline advertises an unbelievably low fare, there’s a good chance it will tack on a “fuel surcharge” or some other extra before you finish paying. The Europeans, however, are proposing a remedy even stiffer than the DOT’s: Airlines must include everything, including all taxes and fees, in any airfare they feature. Bravo, Europe! Let’s hope other countries follow this example.
Playing the game
You can get those super-low fares, but you have to (1) act quickly when you see them, before they sell out, and (2) accept seats on flights the airlines believe will not fill with high-paying travelers. As in so much of travel, flexibility is often the key to the best deals.