Airlines analyze immense amounts of data to set the prices seen by travelers.
JetBlue and Delta aircraft in Los Angeles (Photo: Shutterstock | Markus Mainka)
Travelers searching for flights are no strangers to changing ticket prices, multiple fare classes, and complex pricing models. The modern-day flight booking process involves navigating each airline’s fare options, deciding when to book, and wondering why some transatlantic flights are cheaper than shorter domestic hops.
There is a complex set of mechanics behind what travelers see. Airlines have a limited number of aircraft and limited seat capacity. As profit-seeking companies, they work hard to maximize the revenue generated for each flight through the use of an extensive set of analytical tools. This process is known as revenue management.
Revenue management is all about analyzing and forecasting demand and then determining pricing. The concept is not exclusive to airlines. Other companies with complex inventories and fluctuating demand – such as telecommunications companies and hospitality providers – also invest significantly in revenue management.
A key task in revenue management is predicting future customer demand. Revenue management teams use historical data, statistical models, and other analytical tools to forecast demand and set prices. Airlines employ modern technology to assist them in these tasks, including algorithms, artificial intelligence, and data analysis software.
In addition to predicting demand, revenue management teams focus heavily on the willingness to pay of their customers. Setting prices to maximize revenue is a complicated task that requires balancing a plethora of factors and considerations. Airlines strive to set their prices to optimize revenue while also filling their planes, and revenue management employees are tasked with working towards this goal.
Revenue management has many facets. Airlines must address difficult questions and challenges in their quest to maximize revenue. Here are some examples of the work done by revenue management teams.
As part of their pricing strategy, airlines have different fare classes for each cabin. For example, a traveler looking to purchase an economy class ticket could have options ranging from a basic economy fare – which includes very little beyond the actual seat – to a refundable full-fare economy class ticket that includes checked luggage and seat selection.
When booking a flight, sometimes certain fare classes are not available. This is because revenue management teams determine how many seats are available for each fare class on a particular flight. The airline uses historical data and demand projections to help inform these decisions.
Almost all airlines now use dynamic pricing, which means that prices change depending on factors like time until departure, the number of tickets sold, and projected demand. While the individual price adjustments are often made by computers, the parameters for these automated changes are set based on the work of an airline’s revenue management team.
Many airlines engage in a practice known as overbooking, which is when an airline will sell more seats than there are physically available on the aircraft. They do this to maximize revenue because there are often passengers who fail to show up for a flight. The decision about how many seats can be sold per flight is a complex one that requires analyzing historical trends and the level of risk the airline is willing to take. Selling extra seats brings in more revenue for the airline, but having to deny boarding to passengers adds costs too for the airline.
In an industry where profit margins can be razor-thin, optimizing revenue is exceptionally important.
Airlines are faced with this challenge each and every day, and revenue management professionals work hard to fill as many seats as possible while maximizing revenue for the company.
Receive a daily dose of the airline industry's top stories along with market insights right in your inbox.
The aviation industry is working to address a shortage of aviation maintenance technicians. A 2024 Pipeline Report by the Aviation…
Southwest is cutting its corporate workforce, the airline said Monday. This move ‒ a first for the airline ‒ is…
Wholly owned Delta regional subsidiary Endeavor Air will open its seventh crew base in the coming months. The carrier plans…
