Air fares remain a mystery to many passengers who don’t understand how they fluctuate, why you can get a great deal or pay a lot of money for the same flight, why it can be cheaper to go to New York than to Bordeaux. We will try to explain all this in this article.
So first of all you should know that the airline is not responsible for everything you pay for. Contrary to an urban legend, air travel is taxed and heavily taxed. And especially in France. Some time ago we explained to you all the taxes that apply to your flight ticket.
Travel classes, booking classes and fare classes
- The booking class (economy, business, first…) is not the travel class. The travel class determines all or part of the product, the booking class determines the fare.
- Finally, the fare class determines the fare and the fare conditions (booking x days in advance, flexibility, possibility to book from a certain country, stopover allowed or not etc).
As we said in our article on booking classes and fare classes, on the Air France flight between Paris and New York that we used as an example there are :
- 4 travel classes
- 23 booking classes
- 171 fare classes ranging, potentially, from €51 to €13370 for a return trip.
So now the question that interests the passenger is why he “falls” into one fare class and not another. Well, it all depends on a misunderstood and often maligned practice called yield management or revenue management. In this article we will most often use the term yield management which is the best known but if we want to be precise we will talk about revenue management. There are differences between the two, but not significant enough for the passenger to go into detail here.
Yield management in brief
To get back to the roots of yield management, we need to understand the business of an airline or any business that sells a product or service that cannot be stocked (train, hotel or even electrical energy….). A seat on a plane cannot be stocked, or at least not after the date of the flight.
If you sell clothes it’s a pity that you didn’t sell much today, but a garment that wasn’t sold today may be sold tomorrow or the day after. The sale is delayed but potentially not lost.
In the airline industry if a seat is not sold it is definitely lost. If a seat is unoccupied on tomorrow’s Paris-New York at 10.30am it cannot be sold the next day. If a plane with 500 seats leaves with 450 passengers, you can’t compensate by putting 550 people in it the next day. This seems obvious, but it must be remembered to understand the consequences.
An airline must therefore do its utmost to fill its aircrafts as full as possible, with, of course, the best possible revenue. If the ticket is sold at too high a price there will be no passengers, if it is not sold at a high enough price it will fly at a loss.
Airlines must therefore optimise their pricing (to sell) under time constraints (they have to sell before the flight), capacity constraints (you can’t sell more than the capacity of the aircraft and if you sell less you lose money) and depending on what the passenger is willing to pay.
To do this, the airlines will market different fares that correspond to the needs of a customer segment (class of travel, flexibility, services, etc.) and attach constraints to them (booking dates, travel dates, authorised or non-authorised stopovers, etc.). But that’s just fare segmentation.
Yield management is the “art” of putting or not putting a fare on sale at a given time depending on the occupancy rate of the aircraft to maximise occupancy and revenue.
To use the definition given by Wikipedia:
“Yield management aims to maximise the revenue of a service business. It identifies market segments, assesses their potential and sets prices. It creates fare reduction and travel rules to property an advanced booking process. It monitors their effectiveness and implementation. It manages the available capacity through pricing and service offerings tailored to the specificity of each identified segment.”
or else :
“It is a technique for calculating, in real time, the best prices to optimise the profit generated by the sale of a product or service, based on real-time modelling and forecasting of demand behaviour by market micro-segment.”
How does yield management work?
The principle is therefore to offer the “right” fares at the “right” time. It doesn’t take much explanation to understand that when no one wants to take a given flight you have to lower the prices and when demand is very high you can raise them.
What can lead to low demand?
- Price (but this is precisely what yield seeks to avoid)
- attractiveness of the destination at a given time
- too long connection
- external factors (health, safety….)
And conversely, the same factors, when reversed, cause an increase in demand.
Yield management by example
This is why :
- it is cheaper to go to Palma de Mallorca in January than in August
- there are lots of great promotions on business class in the summer when its usual occupants return to economy to go on family holidays
- tickets are often cheaper during the week than at the weekend…
- a flight with a connection will often cost less than a direct flight.
Yield management in practice
You can imagine that with the number of fare classes, the number of flights, the implementation of yield management must be a real headache and require divinatory skills from those who implement it unless they are risk-taking professionals like traders…
In fact, as you can imagine, more and more of the work is now done by machines and, even when humans are involved, it is basically a statistical science.
The person in charge of yield will of course start from the statistics and learn from the past to anticipate the future. But he will also (otherwise the machine alone would suffice) take into account external events (weather, health risks, non-recurring long week ends with extra days off and public holidays, the existence of a major one-off event such as a sporting event or an exhibition.
Based on this, the yield manager/revenue manager will decide to put a certain number of seats in a given price class on sale for a certain time.
There are of course quite “general” practices
- long before the flight the cheapest classes are opened to start filling them
- At the last minute, only the most expensive classes are opened because this often corresponds to the needs of business travellers who will pay anyway.
And between the two, the talent of the good yield manager will consist of make the right trade-offs based on external factors if he sees that he is late/early in filling the flight which requires a good understanding of the factors that make things go wrong in order to “open” or “close” the right fare classes.
It should be noted that the yield manager has no power over fares: they are calculated by a ‘pricer’ upstream, who ‘divides’ the flight into fare classes. Its role is to make this or that fare class available for sale or not, for a number of seats that it will determine, from day to day, according to the evolution of the flight’s occupancy rate.
Why do prices vary inexplicably?
Two clarifications for those who, despite their understanding of yield management, are surprised to see prices suddenly vary over a short period or according to the sales channel
Sometimes you find a 500 euro ticket and when you come back a few hours later it is 700. Many suspect the airlines of practising IP tracking: a “cookie” is checked-in on your computer when you go to the site so it knows when you come back and increases the price. This would encourage customers to book more quickly without looking elsewhere or comparing. The CNIL recently produced a study which showed that this was not the case.
But what is true is that if a fare class is opened for, say, 10 seats, they can go very quickly.
What can also happen is that a passenger starts the booking process to get an idea of the price, then goes elsewhere, compares and returns. For the reservation system the seat is removed from the inventory while the passenger completes the transaction. If the customer exits the booking process without purchasing the seat, it will remain out of inventory for a given time (often an hour) before being put back on sale. If they come back in the meantime and start the booking process again (or if anyone else does) and it was the last seat on sale at that price, they will be offered the higher price. More than an hour later he will find it at the “right” price.
Then you may be surprised to find a flight at one price on one site and the same flight at a higher or more expensive price elsewhere. This happens because :
- Airlines do not give all their inventory to all sales channels. They can keep their best fares for direct sale or reserve them for their biggest resellers and not allow all online or offline travel agencies or partner airlines to sell them. Sometimes, on the other hand, you will find fares that are only available through certain online travel agencies and not on the airline’s website. This is partly because yield is also used to target certain customer profiles with certain prices.
- This also applies to codeshare flights. Because an airline does not give its best fares to its partners or because it takes a higher margin when selling other airlines’ flights, your Air France flight operated by Delta may be cheaper at Delta.
Goodbye Yield management, hello dynamic pricing?
Yield management has helped airlines become more profitable and, often overlooked, has also given passengers access to cheaper tickets than before, but of course it can be improved.
In the long run, many airlines are looking at “Dynamic Pricing”. which no longer makes it possible to open up a given reservation class to the entire market (even if it means selling it only on certain channels) but to offer a given fare to a given passenger according to his or her profile (sales and travel history, data collected thanks to his or her internet browsing, loyalty programme, etc.) We are therefore entering a logic of individualisation of the fare and the airlines that are exploring this path seem to be recording a significant impact on sales.
But that’s another topic for another article.