June 30--Let's say you're an airline executive focused on maximizing profit. Do you aim to fill every seat on each flight? Or do you raise fares, knowing that a few seats -- or even more -- might go empty.
For most airlines, the emphasis is on the latter. The goal, almost always, is to make the most money. If that means not every seat is taken, so be it.
"You can make it very simple," said Chuck Schubert, vice president of network planning for American Airlines. "If I could sell all my tickets for $10, I am certain I could fill the plane. But I'm also certain I could not make money. It's about balancing the load factor of the plane with the yields, or what people are willing to pay."
American pioneered this pricing structure about 30 years ago, after the federal government deregulated the airline industry, allowing carriers to fly whatever routes they wanted at any fare.
By now, you would think passengers would have figured this out. And at some level, they have. Fliers understand they won't pay the same as the person sitting next to them, and they have come to accept that.But the way airlines price tickets -- the crazy wrinkles that cause prices to rise and fall constantly -- still confuses all but the most perceptive travelers. And as computer systems improve and algorithms become more sophisticated, it becomes even more complicated.
Fare pricing is considerably more complex than the relatively new fees airlines have been assessing. Travelers may not like paying for extras like priority security and boarding, food, flight changes and checked baggage, but at least those things are priced consistently.
Not so for fares. If travelers planning travel for the Fourth of July holiday this week looked carefully during the past several months, they probably would have seen prices fluctuate multiple times.
"It's a question of the ability to charge the right price to the right customer at the right moment," said Robert Mann, an airline industry analyst and former airline executive. "All this depends on an airline's ability to forecast well."
Early is (usually) better
If travelers have learned anything in the past three decades, it is this: They should book as quickly as possible.
"Most people know that the earlier you buy it the better," said Jan K. Brueckner, professor of economics at the University of California, Irvine. "The idea is to use some mechanisms to segment passengers into different groups that have different price sensitivities, and to charge different prices to these different groups."
Late-booking business travelers, then, get stuck with the high fares, while leisure passengers pay less.
But this system is not perfect. In 2012, the travel website Kayak studied roughly 1 billion airfare searches. It found the sweet spot for domestic travel is 21-35 days prior to departure, while, for international flights, the best time is within three months.
That means booking too early -- before airline analysts have had a chance to monitor supply and demand and set ticket prices accordingly -- can actually hurt customers.
It might seem unfair to charge late bookers more for what is essentially the same product. But Brueckner said it's wrong to compare an early seat to a late one. For the person who bought the ticket less than a week before the flight, perhaps to attend an important business meeting, the seat is more valuable.
"Customers think, 'God, this is so outrageous, There I am sitting in this $600 seat and the guy next to me bought it for $290,'" Brueckner said. "But the fact is those seats are different products. The $600 seat was probably bought last minute."
Passengers might also have better luck using busier airports, like Los Angeles International Airport, rather than ones with relatively fewer flights, like L.A./Ontario International Airport, because bigger airports have more supply of seats.
"LAX is a fairly competitive marketplace," Mann said. "At the satellite airports that's less the case. There's smaller equipment. Less supply."
But even that's not a perfect approach. Smaller airports can have lower fares, too, especially if there's competition on routes. It pays to look around.
Full planes not always necessary
In 2012, U.S. airlines filled 83 percent of seats, according to federal government data. It was a strong number, but it probably could have been higher.However, that's not necessarily what airline executives want."While full planes are generally a good thing, it's not necessarily a given that full planes are profitable planes," American's Schubert said. "Depending on the fare environment, you might be willing to take less passengers. There is a balance between the number of people on the plane and what people are paying. It's not necessarily the number of people on the plane."
At American, Schubert said 20 percent of the customers make up 70 percent of the revenue, and the carrier wants to accommodate those travelers. Maximizing profit is why almost every American flight passes through one of the country's business centers -- Dallas, Miami, Chicago, New York and Los Angeles. Maybe the airline could fill a plane between two non-big cities, but it's not likely the route would make money.
Recently, the question of filling planes has been an issue L.A./Ontario International Airport, where traffic has dropped precipitously in the past five years. According to Ontario officials, about 6 million people live within 25 miles of the airport.
That should be enough to fill a lot of airplanes. But for Delta Air Lines, the number of potential customers wasn't enough to prop up once-daily service to Atlanta, which the carrier canceled in September 2012.
"It's something we hear all the time: 'I was on a full flight so you must be making a lot of money."' said Bob Cortelyou, Delta's senior vice president of network planning. "A lot of times it depends on what type of fares the passenger wants to pay."
Sometimes your airline doesn't want you
Occasionally, other variables push prices, ones most passengers don't consider.
Airplanes can only carry so much weight, and, sometimes, it might be more profitable for a carrier to transport high-value cargo than a few extra customers. In that case, an airline might not even try to sell every seat.
Or an airline might not want to sell a ticket for a short-haul, round-trip flight -- like Ontario to Salt Lake City -- if it thinks it can make more money selling that seat as part of a more lucrative itinerary. Rather than matching another airline's $79 fare for such a short flight, the airline might prefer to hold space on the Ontario-Salt Lake flight for passengers who are continuing onto Paris.
Mann, the aviation consultant, called this phenomenon "protecting the seat."
"The example I always use is Austin to Dallas," Mann said. "If you are going to go Austin to Dallas and the carrier has the opportunity to carry someone from Austin to London, it's not even a question. You will not get on the airplane."
More transparent pricing not likely
Every now and then, an upstart airline announces plans to counter typical airline pricing. Promising more straightforward fares, executives say they're going to be different, more customer friendly.
Yet, usually, the airline ends up pricing its tickets in a more traditional manner. Perhaps it adds a small wrinkle, like slightly more transparent fares, but the idea is the same. A notable exception is Allegiant Air, a highly profitable airline that succeeds by offering cut-rate fares and filling planes close to capacity, mostly with leisure passengers, who are hit with additional fees for just about every service the carrier offers.
"They are trying to make money," said Brueckner, the UC Irvine economics professor. "The industry is incredibly competitive. The airlines are trying to squeeze out the last dollar everywhere they can. They may commit to these simple schemes, but they aren't as profitable as the other models."
But Brueckner said he doesn't understand most passenger criticisms. With a little research, he said, passengers can find the best price.
"I go on American Airlines' website and there's a fare," he said. "It's right there. They tell me what it costs. It might be complex in that there is a really complicated algorithm that generates the fare and it might be different a day later, but it isn't complicated."
Copyright 2013 - Daily News, Los Angeles
