Jeanne Walker

How do airline pricing algorithms work?

Jeanne Walker

How do airline pricing algorithms work?

Until a few years ago, the norm for setting prices was to have fixed prices. But with the advance of technology came variable fares, which harness the power of machine learning and Big Data, to have a pricing system that is flexible and responsive to the demands of users and the state of the market.

The constant ups and downs of flight prices are due to a concept called revenue management: adjusting fares in real time so that airlines can maximise their profits. These sudden changes are caused by computer programmes with specialised algorithms. This technology stores decades of data on passenger habits and payment patterns, allowing companies to predict rapid, short-lived increases in demand.

This method of setting prices algorithmically is what some companies like Uber implement for the entire business: when there are spikes, it raises prices to match supply and demand. As the supply of vehicles is not infinite, they decide to raise prices to reduce demand and also shore up supply (drivers who choose to go to this area because it pays better).

Under normal market conditions, the process essentially consists of selling cheaply to customers who buy tickets in advance and reserve a certain number of seats to be sold at the last minute, without discount or at a higher price. Last-minute booked sales tend to be the most profitable, as these are usually passengers who need to travel in a hurry, so their price sensitivity is much lower than that of travellers who book in advance.

Airline algorithms are secret and usually proprietary to each airline. This leads some consumers to suspect unfair practices or have reservations when purchasing a ticket. There is a well-known case of an online hotel search engine offering more expensive rooms to Mac users than to Windows users. Because, in effect, Mac users tended to be willing to pay more and would change the order of the results so that more luxurious rooms appeared first.

How are flights priced? The airlines' best-kept secret

Buying airline tickets is madness when trying to find the best price: fares change every day and you never know why or what to look out for. Airlines set the price of flights using algorithms and depending on parameters such as supply and demand, but also the price of fuel.

Finding cheap flights is one of the key tasks when it comes to organising our holidays and getaways. Even more so in a summer like this one, when travellers will be facing the most expensive holidays of their lives.  Almost everyone likes to travel while spending as little as possible, and the price of airline tickets is one of the biggest outlays when it comes to organising a trip.

Although it has long been thought that Tuesday was the day of the week when airlines had the best prices for flights, this no longer seems to be the case. The way airlines set prices has changed a lot in recent years, which may have affected the existence of this optimal day to buy airline tickets.

Airline ticket prices now fluctuate every day based on algorithms that use variables such as the number of seats available on the flight, competitor prices, public holidays or the date in advance.

Although all airlines follow certain common parameters when determining prices, the truth is that each airline has internal criteria with which it decides the price using algorithms and computer programmes.

The first thing airlines do is to delimit their target public and, based on this, they adapt the capacity of the aircraft. Normally, they are usually divided into three or four segments, depending on which segment the company operates, such as low-cost or business.

On the other hand, there is the cost analysis carried out by the company based on its numbers. The premise that all of them usually work on is that the planes spend as little time as possible on the ground, because this consumes a lot of economic resources and they always try to keep the planes moving as much as possible.

One of the factors affecting ticket prices is the optimisation of the specific ticket fleet. 

In addition to these points, a basic issue is the development of routes. Departments that determine which routes are viable make campaign or annual forecasts. Calculations are made on a period basis, not for a specific aircraft or a specific day, but for all campaign periods to see how profitable each seat is.

Beyond these internal strategies, demand or the price of fuel - which has an enormous weight within the costs faced by airlines - are two of the parameters that can be most relevant when pricing the ticket.

Finally, the incorporation of new technologies and, above all, artificial intelligence helps to see the profitability of certain routes. This constant measurement was previously unfeasible, but now it is projected in the large macroeconomic and economic tables used by all these departments.

Hiding on the net

If you haven't noticed, when you take a second or third look at the same flight or hotel, the price is likely to go up. This is because of the cookies that are stored on your device every time you visit a website and that indicate that you have a certain interest in that particular page. To avoid this, there are several tricks to hide yourself online, always with good intentions. Although it is possible to delete cookies from browsers, it is a measure that is not entirely advisable, as there will be certain information that we would like to keep when surfing the Internet. 

For this reason, the incognito mode included in browsers is a tremendously useful tool for not storing cookies on our computer and for having a truly private browsing experience, without anyone being able to trace what we do. In this way, you will be able to enter the flight and hotel booking pages several times without altering the prices.

But activating private browsing will not protect you one hundred percent. If you have your device's location enabled, the prices displayed on the screen may also be different. Due to the standard of living in different countries, a resident of Switzerland will get much higher prices than someone living in Argentina.

Be careful with the timing of your booking

Dates are critical when planning a trip. Booking airline tickets in advance is often advantageous. The greater the time separation between the time of purchase and the time of travel, the cheaper it will be. The same is true if you wait until the last minute. For airlines, an empty seat is money lost. Therefore, seats that have not been sold until the last minute will enjoy a sort of discount.

Even so, check the calendar when organising your holiday. Flying to a city where there is a major sporting event, a large concert or some other special event will make travel more expensive.

The beginning of the month also tends to see higher demand for flights. People have been paid during these days and are less reluctant to spend money. And, although it may seem otherwise, the day of purchase is also important. Tuesday and Wednesday are the best days to buy a plane ticket.

Basically, if you are not in a hurry when making a purchase, try letting it sit in your cart. Pricing algorithms don't like it when transactions are not completed, so some message will pop up indicating that there are items in the cart.

If you still prove to be stoic, it is likely that our half-bought product will experience a price reduction. In this way, the shops or airlines try to check if the purchase is finalised.

Don't be swayed by pop-up messages either. It has been proven that showing potential buyers messages indicating low availability or that there are several users looking at the same product causes a feeling of distress that leads to a more impulsive purchase than it should.

Even smartphone model influences prices

Dynamic pricing algorithms are aware of every detail. Among the information provided to different websites when browsing from a smartphone is the smartphone model. The systems analyse the models and, depending on whether it is a high-end or low-end device, will adapt the price. The same goes for the battery: the lower the battery at the time of the visit, the higher the price. This is why it is important that whenever a major purchase is to be made, it should always be done from a computer.

Those who have enough time and want to 'play' with the algorithm can try different strategies. Perhaps a user can spend weeks browsing different websites that do not appeal to them or looking for trips to places they are not going to go. This way, when you proceed to search for your real destination, the algorithm will not be sufficiently trained to counterattack with its price hikes.

Because of course, the algorithm learns fast and tries to play the cards in its favour. But there is no tougher opponent than a user with enough time and all the tools at his disposal.

Enjoy your holidays, if you manage to book them in time.


Jeanne Walker

International consultant

The authors are responsible for the choice and presentation of the facts contained in this document and for the opinions expressed therein, which are not necessarily those of Tourism and Society Think Tank and do not commit the Organization, and should not be attributed to TSTT or its members.

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