A major part of my objective with my personal website is to entertain and educate people on the magical industry that is aviation. A question that I often hear is “how do airlines come up with what they ask for their tickets?”. I wish the answer was as simple as what I will explain below (and try to answer your question).


The most basic thing in this story is to consider we always talk about fares based on 1 route. From “A” to “B”. (Ie. Amsterdam – New York) Sometimes this might bring people through “C” (Amsterdam-London-New York) or even “D”. (Amsterdam-London-Charlotte-New York) That doesn’t change anything on the fare; its what an airline asks to bring you from A to B. In this article I also don’t talk about the practice of “Yield Management” which will be covered in a separate article.

Getting started:

So if an airline wants to determine the price for a destination, the first thing they will do is look at the costs; what do we expect to pay for fuel, services, fees and more costs affiliated with operating a route. But whats even more important is to determine if there is any demand? And how much competition exists by other airlines (also remember the A to B via C story from above). Usually, the most important questions airline executives and departments will definitely cover are mentioned below:

 

  • “What kind of route are we talking about?”
    Is the route fully aimed at business travellers or mainly tourism? Or maybe a mix? Prices are often based on the mix of travellers aimed at. Amsterdam – Houston is more business traveller oriented than Amsterdam – Los Angeles (which can even be cheaper)
  • “Are we alone on the route?”
    Competition on a route often means lower prices. If there is heavy competition airline often have to drop their prices. Also, take 1 and 2-stop flights into account. These are also considered to be competition and may push hard on prices. (Turkish Airlines is the only one flying to Somalia; fare prices on this route are insane (owning the route 100% = €€)
  • “How much business class can we sell?”
    A lot of business class demand means the airline can reach a higher revenue. This can reflect a lower ticket price for economy class fares. The opposite of often true for the business class fares
  • “Are we the only ones flying direct?”
    Nobody (except me) likes to make a stop if they can fly on a direct flight. Fares on direct flights are usually much more expensive because these are being sold as a premium product.
  • “Whats the distance from A to B?”
    Distance makes sense; the further a flight is, the more expensive it usually is but it’s not the main driver for prices; often I see far away destinations that are a lot cheaper than ones closer to home. Good example: Amsterdam – Paramaribo sells for €699 while Amsterdam – Sau Paulo (2.000 miles further, sells for €499).
  • “Is there any airline active on the route we want to hurt?”
    Killing competing airlines is best done by stealing passengers to ensure their cabins are very empty. Dumping prices is a very effective tactic to do this but it might also pressure an airline’s own margins.
  • “Is this route important to offer for passengers from A to B?”
    This one is a little more confusing; some routes (and their fares from A to B) are not meant to be booked by passengers from A. This would be a “feeder route” that the airline wants to use to offer to passengers using its hub. (Amsterdam – Ibiza on KLM is pretty expensive because KLM wants to offer Ibiza to its passengers from Asia and the USA)

Bottom line:

Whenever you see a very expensive destination and you ask yourself “why are they charging so much for this route?”, you have a few case examples that you might be able to use to understand why airlines have set certain prices.

The fare level process is a dynamic and constantly changing process and, combined with Yield Managment, a very interesting practice that makes aviation the interesting and magic gem that I consider it to be. My next article will go more in-depth on the practice of yield management; reasons why there are so many prices for the same destination and how this system is used.

If you have any remarks and or questions in the meantime feel free to get in touch with me or use the comment box below; I’d love to hear from you!

One thought on “Airline Masterclass – How do airlines come up with their ticket prices”

Leave a Reply

Your email address will not be published. Required fields are marked *