Learn / The airline business

How airlines set prices

Two people in the same row often paid very different fares. That’s by design: airlines sell each flight at many prices and adjust, day by day, how many seats are left at each. It’s called revenue management.

The problem

Airline costs are mostly fixed once a flight is scheduled: the aircraft, crew and fuel cost nearly the same whether it’s full or half-empty. And a seat can’t be stored: once the doors close, an unsold seat is gone. So the goal is to fill the aircraft without selling seats cheaply to people who would have paid more.

Fare classes

Each cabin is sold in several fare classes (also called booking classes or buckets), marked by letters. Cheaper ones come with restrictions, like fees for changes. Leisure travellers who book early buy the cheap classes; business travellers who book late and need flexibility pay more.

How many seats at each price?

Revenue management systems forecast how many people will want each fare on each flight, using past bookings, the season, events and competitors’ fares. They then protect seats for later, higher-paying demand and release the rest at lower fares. If bookings run ahead of forecast, cheap classes close early; if they lag, more seats go on sale at lower prices.

Network airlines also think in journeys, not flights: a seat from Amsterdam to London might be worth more to a passenger connecting on to Singapore than to one stopping in London.

Overbooking

Some passengers don’t turn up. If an airline never overbooked, many flights would leave with empty seats that someone wanted. So airlines sell slightly more tickets than seats, based on forecast no-shows, and compensate anyone who can’t travel.

Prices beyond the seat

Many airlines now sell fare families, such as light, standard and flex, and earn ancillary revenue from bags, seats and extras. Low-cost airlines rely on it most.

How do airlines know it worked?

Two numbers: the load factor, the share of seats sold, and unit revenue, the revenue per seat flown. A full flight of cheap fares can earn less than a fuller mix; the aim is the best combination.