Thursday, 30 March 2006
Business Week on rising airfares
Soaring Above High-Priced Airfares (by Marc Hogan, BusinessWeek online, 30 March 2006):
Posted by Edward on Thursday, 30 March 2006, 08:24 ( 8:24 AM)
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SAVVIER AIRLINES. With peak travel season on the way, rates will move inexorably higher, industry watchers say. "Fares are going to go up one way or the other," says Edward Hasbrouck, author of the travel book series The Practical Nomad . Nor can vacationers count on last-minute deals. Short-notice fares became common in recent years because airlines underestimated demand, Hasbrouck says. They aren't expected to make the same mistake in 2006.
I'm no expert, so take my questions with a BIG grain of salt...
Did the airlines REALLY underestimate demand? I think load factors have been increasing at a steady rate over the past several years - regardless of the reduction in capacity after 2001.
Unless you get load factors up over 90% (which I think would be amazing), aren't you always going to see short-notice fares? After all - the 'golden rule' of commercial aviation still applies... after you pay off the bottom line, every extra seat you sell is money in the bank!
In the previous comment, Matty asks, "aren't you always going to see short-notice fares? After all - the 'golden rule' of commercial aviation still applies... after you pay off the bottom line, every extra seat you sell is money in the bank!"
Airlines set prices to maximize revenue. A certain percentage of people -- business people, people with family or other emergencies, etc. -- only find out at the last monute that they need to travel, but need to travel urgently and are willing to pay a very high fare.
Suppose there are 15 seats unsold a day before the flight. Suppose also that there are 2 people willing to pay $1500 each for a last-minute ticket, and 10 people willing to pay $200 each for a last-minute ticket. If the airline has a last-minute sale fare of $200, they fill 12 seats and get a total of $2400 in fares. If they set the last-minute fare at $1500, they fill 2 seats and get $3000 in fares.
As in this example, the most profitable strategy for the airline is usually to keep the last-minute fare very high. The airline makes more money that way, even if it means that more seats are unsold.