Monday, January 28, 2013

The Mechanics of Business travel - 3

What is a ‘fixed’ ticket price? Well actually there is no such thing as the cost of a particular ticket usually varies greatly throughout its life. You see a ticket is like any other commodity in that its value gets smaller as its likelihood of sale diminishes. In the case of an air ticket the value hits zero as soon as that aircraft takes off with an empty seat on it. An airline flight seat is more perishable than a bunch of ripe bananas.

It has taken a while but airlines have now recognised this having competed and mainly lost to no frills companies that work on the ‘stack them high and sell them cheap’ business model. Now you have the most conservative of the major airlines of the world discounting their prices to produce full flights. Everyone is working on the same concept which is to sell their seats at the maximum price they possibly can but shift them nonetheless.

I challenge anyone to run a straw poll on price paid on any airline flight and I can almost guarantee that they would all be different. Much depends on the popularity of the service as the ‘rush hour’ peak aircraft will always be able to charge a premium for the exclusivity of what they have.

If you are flying to Paris on business on a Monday morning there is no point in arriving early afternoon so you, like everyone else in that situation, pays extra to go early and do a full day’s work.

So how do airlines work out their fares? Firstly they look at the trends. They see how that flight did previously going back a considerable distance. They calculated who paid what and when. They identify when they booked and how often people then cancelled. Then they look at how full the aircraft was and what prices people paid who occupied those seats. They learn from this information and build a pricing plan.

The vast majority of airlines invest in ‘yield management’ as a way of optimising seat usage and making money. I would say the price of a seat in a particular cabin on an airline can change over 50 times from first being put on the market up to departure time. Get it right and you have a full aircraft and no wastage. Get it wrong too often and you go out of business or need a government bail out!

Everyone knows that only individual private travelers and tourist book and pay early so the prices initially start low. Closer to departure date you get the more thrifty business traveler and those that need to go more suddenly so the price goes up. Three to four days out you have the business traveler.

They need flexibility and they have to go so they get hit with the highest fares. The day before, if there are any seats left, they are discounted for the last minute traveler who is looking for cheap deals and can risk being turned away
This is the sort of basic model that is used today. Within that there are prices for groups booked together, ships crews, tour operators and numerous others. Success or otherwise is measured by filling that last seat however they can, and at the best price for the airline. Most planes are overbooked by airlines as they even gamble on how many folk will turn up on the day. This is especially true when an airline operates different classes as they feel safer overbooking economy seats if they can upgrade any surplus into business class. This happens a lot.

Another method of selling large volumes of seats is through consolidators and wholesalers. These people have a lot of customers and they buy seats at low net prices from airlines for resale to their own market. Airlines get less but they have outsourced the responsibility of selling them to a third party.

How do you get the best ticket price? The only way is to book when others do not. Either early or risk a last minute attempt. It is like a game of chess really, except your competitors employ ‘grand masters’ to play their pieces!

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