This video was made possible by Blue Apron. Get three free meals from Blue Apron by being
one of the first 100 people to sign up at the link below. Airline ticket pricing probably seems like
a crapshoot. The numbers change seemingly arbitrarily every
week, day, or hour, but there’s some real science behind these prices. People spend their whole lives figuring out
what to charge you to fly. Let’s take a look at one flight on one route
by one airline to understand. American Flight 33 leaves New York’s JFK
airport every day at 7 AM bound for Los Angeles arriving at 10:51 AM pacific time. This transcontinental route is one of the
most competitive in the world with over 3.5 million yearly passengers and five major airlines
connecting the country’s two largest cities. There’s nowhere where pricing strategies
are more important for airlines than here. Looking at three months of fares for this
flight, there are eight distinct prices for economy ranging from $129 to $472. These all get you on the exact same flight
in the exact same seat but each and every price has a purpose and place. The lowest price, $129, is the most competitive
price. This fare only shows up three times in our
three month span—each time on Tuesdays. Now, Tuesdays are very often the cheapest
days of the week to fly. Business travelers tend to make up much of
the demand during the week and they most often want to fly out on Monday and return on Thursday
or Friday so Mondays, Thursdays, and Fridays tend to be the most expensive travel days
while Tuesdays and Wednesdays are often the cheapest. The average ticket price for this flight shows
this—Tuesdays average $182 and Wednesdays $173. Even if the demand is lower American Airlines
runs the flight anyways and they have to fill seats to break even so they sell the flight
at rock-bottom prices. The next price, $144, actually demonstrates
a very interesting phenomenon. Whenever American prices their flight at $144,
they are not alone. Take March 6th for example. American, Delta, Virgin America, JetBlue,
and United all have flights from New York to LA at around 7 in the morning selling for
$144. They’re doing what is called price matching. Because this is one of the most competitive
routes in the world and because the number one determinant for travelers on which airline
they take is price, all five airlines flying this route match each others prices. This way, travelers make their decision based
off the reputation of each airline rather than the price. The price stays at $144 because it’s in
each airlines best interest to keep it there. In a normal market, if Delta, for example,
dropped their price to $119 they would get more travelers since they were the cheapest,
but in this price matched market all the other airlines would drop their prices as soon as
Delta drops theirs so all of them would get the same amount of travelers as before while
earning less money, but there are some cases where it can make business sense for airlines
to drop prices to below even being profitable. Around the year 2000, WestJet and the now
defunct CanJet airlines started flying from central Canada to Newfoundland. These routes were historically operated exclusively
by Air Canada and they were expensive. A one-way flight from Montreal in 1999 cost
over $600, but when the budget airlines WestJet and CanJet started flying the route, prices
dropped dramatically and Air Canada was threatened, so they dropped their prices even lower. The $600 Air Canada fares then cost $89. Now, it wouldn’t make sense for anyone to
fly a budget airline over Air Canada at the same price so WestJet and CanJet were almost
driven out of business on these routes, until Canada’s Competition Bureau stepped in. They concluded that Air Canada was engaging
in the uncompetitive action of predatory pricing since they were pricing flights below what
it cost to operate them, so they were forced to stop. Airlines in the US, with some newly strong
budget competitors, are engaging in similar actions nowadays. United airlines, for example, is matching
Frontier’s $40 fares on many days from Denver to Chicago, among other routes, in order to
maintain their market stronghold in Denver and Chicago even though their cost to operate
the route is drastically higher than Frontier so they are almost certainly loosing money
on those fares. But back to the New York to LA route. $159 is the lowest regular fare for this flight. The $129 and $144 price points were both basic
economy fares—the most restrictive type with no seat selection, no carry on bags,
and no changes or refunds. Every flight has a bunch of different booking
classes each with a fare code. For example, the basic economy fare code for
the $129 and $144 price is B, but the $159 price books into fare code N. These different
booking classes are sometimes known are fare buckets. Essentially the airline decides it’s going
to sell a certain number of tickets at the $159 price with fare code N, let’s say 10,
then when those ten tickets are sold the airline then sells economy at fare code G for $204
then when those are sold it sells economy at fare code V for $269 then fare code L for
$318 and so on and so forth. There are also some cases where a ticket will
default to a more expensive fare bucket because of reasons other than the lower fare selling
out. Many fares, including each mentioned so far,
have advance purchase requirements meaning that, even if a flight is not full at all,
the price will increase closer to departure. All the fares below $204 have an advance purchase
requirement of two weeks meaning that you can only purchase them more than two weeks
before departure while the $269 fare, for example, has an advance purchase requirement
of only one week. Although, the cheapest fare without an advance
purchase requirement at all, that is, the cheapest fare that you could buy day-of for
this flight is fare class K at $472 which happens to be the most expensive economy class
fare. And now for some caveats. Not every fare for this flight is going to
be priced at one of these eight prices. Airlines have mechanisms to adjust fares from
these buckets. In the short-term, they can adjust things
like the fuel surcharge to raise the price if other factors, like oil prices, increase. In the long term they can adjust the actual
prices of the different fare buckets. Airline often increase the base fares for
busy seasons like summer. American Airlines does exactly that on this
New York to LA route where their fare class M, for example, increases from $357 to $410
in August. But so far we’ve looked at this at a micro
level—how prices differ on one flight—but we also have to consider the macro level. Why if you leave on Tuesday February 6th and
fly 2,469 miles to the west to LA do you pay $129 while if you fly 3,442 miles to the east
to London—only a thousand miles further than LA—you pay $2,772. Well, the second figure is a bit deceptive
because that’s the price of a one-way ticket. If you switch the LA flight to a round-trip
ticket returning a week later it will cost $257—exactly double—while if you turn
the London flight into a round-trip returning a week later the price will drop to $602—almost
five times less. This is understandably confusing—a one-way
ticket that costs more than a roundtrip—but the reason this is goes back to the fare codes. Embedded within each fare code are a bunch
of little restrictions that dictate when you can use that fare. On the New York to LA trip those restrictions
are just things like blackout dates for the fare and advance purchase requirements, but
the New York to London ticket has loads more restrictions and the ones that make one-ways
more expensive than round-trips are the minimum stay requirements. These requirements dictate how soon your return
flight can be in order to get a particular fare. The idea is to price discriminate—business
travelers should pay more because they can pay more. Meanwhile, airlines try to give the lowest
prices to leisure travelers since they’re the ones paying for their own tickets and
therefore they’re the ones that are the most price sensitive. Business travelers often want to be home for
the weekend, so many of these minimum stay requirements, like with fares Q, N, and S,
just require a Sunday at your destination. Others, trying to accomplish the same thing,
require seven days, a full week, which would also require a traveller to stay the weekend
at their destination. Now as the prices go up the requirements go
down so once you get to paying around $2000 you can stay for as few as three days, but
the cheapest roundtrip base airfare with no stay requirement at all is $5,544 in fare
class Y—exactly double the one way price. So that explains this—the one way ticket
is so expensive because, since the airline doesn’t know how long the traveller will
stay at their destination the one-way fare has to be booked into the least restrictive
fare class without the minimum stay requirement. You’ll see this idea of price discrimination
all over ticketing structures. It’s a genius pricing concept that allows
different people to buy products at the prices they can afford and therefore its allows businesses
to sell the same product to more people. Tickets increase in price closer to departure
because leisure travelers buy tickets far-out and business travelers buy their tickets close
to departure and flexible tickets are more expensive because that’s what business travelers
need, but there’s another pricing difference going on that’s less fair—between routes. It’s all about competition. Different routes of the same distance cost
different amounts generally not because they cost different amounts to operate, but because
of how much the competitors are charging. This is part of why flights into small airports
are so expensive—because they lack competition. You can fly the 240 miles from Detroit to
Pellston, Michigan on a CRJ 200 for $242 or you can fly the 170 miles from Detroit to
South Bend, Indiana on a CRJ 200 for $76. The only difference is that South Bend Airport
has flights from United, Delta, and Allegiant while Pellston only has flights from Delta. The same phenomenon happens over the Atlantic. There’s more competition on the six hour
flight from New York to LA than on the six hour flight from New York to Dublin so you
can fly to LA for $250 round trip while Dublin costs $500 round trip. Of course, travelers from New York to LA can
drive, take the bus, take the train, or take a flight connecting halfway there while travelers
to Dublin only have one choice—to fly. In all, the truth is that prices reflect what
people will pay and so people will pay what flights are priced. If you’re a busy person like me, you know
that eating healthy can be difficult. Sometimes it seems like you have two choices—quick
food or healthy food—but you have another one—quick and healthy food because that’s
what Blue Apron is. Blue Apron ships you boxes every week with
farm-fresh pre-apportioned ingredients and recipes that let you make these delicious,
healthy meals in at the very most 40 minutes. I recently made the Spicy Pork and Korean
Rice Cakes meal which was delicious and quick. With Blue Apron, you’re sure to get stuff
that you’ll actually like because they have a selection of eight different recipes each
week from which you can pick. All the ingredients arrive in a refrigerated
bag, ship to most everywhere in the US, and start at just $8.99/10.99 per serving. I highly recommend you try Blue Apron out
and the good news is that you can try out three meals for free at the link in the description.
Why can’t you get a round trip ticket from NY to London and just not show up for the flight back? Wouldn’t that save you a lot of money for a one way trip?
Pretty interesting subject. Any recommendations on resources I could pick up to delve into this deeper?
Why are minimum stay requirements a thing? To gouge more money out of business travelers and protect leisure travelers?