A Brief History
An airline seat is an airline seat, yet it is priced differently under different conditions, during different travel periods, and at different booking periods. In the days of regulated airfares prior to 1978, there were essentially three fares – First Class, Economy, and Advance Purchase Excursion fares. A 1955 Trans World Airlines (TWA) ad shows New York to Frankfurt for $328. Adjusted for inflation, today that would be worth $2,910. This can be easily booked at 1/3 of the price today, and sometimes even lower. In those days, many seats were unsold except at peak travel times.
Many airlines operate with a 80+% “load factor” meaning on average, 20% of seats are empty. These empty seats are mostly found on high traffic business commuter routes where corporate travellers demand frequency and flexibility in exchange for higher average fares per mile flown. Leisure travellers demand the lowest price, and so flights are nearly full to leisure destinations.
Supply & Demand
Supply and demand vary by many factors that the airlines don’t even understand. Overall, the market for travel has grown significantly each year as travel is more affordable, disposable income higher, and interest rates lower. Competitor actions – an existing airline starting to fly a new route, increasing or decreasing frequency of flights, increasing or decreasing the number of seats on the aircraft, and increasing or decreasing aircraft size, will all affect the supply. Sometimes, aircraft are placed on routes to “optimize” an overall schedule, but not necessarily maximize opportunity on a route. A bigger aircraft could easily be supported by the market for a once or twice weekly duration, but there are no available aircraft without acquiring a new one that has to fly every day. A big aircraft may be used because a smaller one is not available. These have an effect on the number of seats available that change season to season, and year over year. It’s why what happened last time you travelled is not necessarily going to happen again.
Hotel supply and demand changes less in the short term, as building and tearing down hotels is an expensive and time consuming proposition. But make no mistake, the increase in the number of rooms available for sale on an island like Jamaica over the last several years has had a dramatic effect on lowering pricing, and the increasing the quality expectations of guests.
Conditions Affecting Pricing
Hotel contracting also makes a difference. When a tour operator commits to buy 7 night stays in blocks and guarantees the hotel revenue for an entire season or year-round, the price dramatically falls. Seven night durations work nicely as there are no empty unsold rooms (especially during the midweek). This is why you will sometimes find 7 night packages the same price as a 5 night package.
Leisure travellers to New York might think that weekends would be more expensive than midweek, but the big business travel market commands a premium during the week. The city empties on the weekends by comparison, even though it is popular for tourists. This balance of demand means that the lower priced weekends keep hotels full all the time.
Desirable seat locations (with more leg room), desirable room categories and room location, and conditions around making changes, baggage & meal inclusions, and other attributes are tangible ways travel suppliers are trying to differentiate what would otherwise be an airline seat or hotel room. Customers with higher expectations of service and flexibility are willing to pay more, and the no-frills products are far more price sensitive.
Artificial “rules” are created for conditions of a fare such as minimum / maximum stay requirements in order to capture higher yield business travellers. For example, the 7 day minimum fare rule for great fares Transatlantic or Asia means that business travellers pay more. These artificial conditions are mostly gone in North America and within Europe due to the incredible competition posed by low cost carriers. Whatever the airlines might gain by targeting short stay leisure travellers transatlantic or Asia are offset by what they would “give away” in lower fares to business travellers who stay as short as possible.
Airlines, cruise lines, and hotels have sophisticated software that allows them to track future revenue and identify weak dates and fast selling dates. They can compare to historic patterns and determine if it makes sense to raise prices or lower prices to capture more travellers who will only pay so much. This is further done by manipulating fares in different markets. For example, if an airline has no competition on flights from a small city in the US Midwest to their hub city of Chicago, the fare between the city and Chicago could be much higher than a fare on the same airline connecting through Chicago and going to another city. In other words, two flights are cheaper than one flight. Crazy. The reverse is true – there may be little demand from Chicago to this smaller city in the Midwest, so the fare from Chicago could be a lot lower. Airlines will play with inventory on various routes, in various markets around the world, and price differently.
Essentially travel suppliers “get what they can” – they know there are some people willing to pay far more than others, so they sell a certain number of seats at various fares and conditions to get as much as they can. On top of this, some routes and rooms are winners or losers at certain times of the day, week, or year, but they need to maintain a presence year round.
When you buy in bulk, you should pay less right? Yes – to a certain extent – depending on how well sold the flight or hotel is. Really far in advance of travel, it is great when a group comes along and looks after filling a good number of rooms all at once. For that, often the travel supplier will extend better pricing and sometimes more flexible conditions. But sometimes, the group will result in higher prices than what individual tickets and rooms are selling for. It’s supply and demand. The group all wants to travel together and there are 50 people, but it is a small aircraft of only 130 seats. At this point they are sold better than expected with 50 seats sold. If they sell 50 seats, they will only have 30 left to sell months in advance. They know they will have no problem selling 80 seats, so they command a higher price for the privilege of getting all 50 on the plane at once. Corporate incentive group? “We’ll pay the premium.” Leisure Wedding Group – maybe not – “maybe we’ll change our date to a better price?”
The same applies for hotel rooms. Hotels contract with tour operators for very low rates, but they want to hold back rooms for the nightly market or other countries where they can get higher prices for their rooms. So when you ask for rooms above the tour operator’s allotment, they may come back at higher prices because the hotel can get higher prices elsewhere. How bad do you want that hotel or dates? Customers can be surprised by this.
If you’ve ever worked in a restaurant, you know that handling a group is far more expensive than handling the same number of individuals. Taking the orders at once, cooking all the food so it is delivered all at once, and delivering it all at once is more work than multi-tasking the timing of several tables. Each table “turns over” faster than the group that tends to linger on and socialize. People are often surprised that they cannot get a group into a popular restaurant on a busy night, or they are asked to “buy out” the restaurant for the whole night (costs twice as much). It’s the same with hotels handling groups – they know they need more staff around at bars and restaurants all of a sudden, in meeting rooms, and in lobbies when groups are moving. It’s an example where sometimes larger groups are higher priced than individuals.
When you book a smaller group early inside the tour operator’s negotiated pricing allotment, or, in off season, you can usually get some concessions in pricing. You need to remember that they are starting with the lowest contracted rates already. Larger hotels can handle groups more efficiently than smaller ones, where the personalized service will be disrupted by handling a large group (not unlike the restaurant example).
Groups are sometimes subject to what is called “stop sells”. This happens when a group is being held as speculative space without names or payments attached. The hotel may demand all names and payments if they have other customers asking for confirmed space. It means that fence-sitters that haven’t committed to booking yet could be out of luck, at least getting the negotiated group price. It could also mean that people who decide to join the group after thinking about it end up paying a higher price.
Tour Operators and Re-sellers
Companies take risk by purchasing or contracting blocks of rooms and airline seats for packaging tours and other products together. By creating packaging, the pricing of the individual flight or hotel room is not comparable to each component. Consumers can price the components individually and see that the package is less expensive, but the actual flight or hotel price is unknown. This is another method travel suppliers use to fill space without destroying their pricing strategies.
Travel agencies, tour operators, and consolidators then resell to consumers in various worldwide markets. In order to get very low rates, these companies agree to conditions like non-refundable payments and various release of unsold space conditions that may place the tour operator at risk for the travel services regardless if they are sold or not. This risk can cause volatility in pricing up and down based on supply and demand. If space is limited, the space on risk can be sold at a premium (March Break etc.) and at other times it is sold below cost to reduce their losses of completely unsold seats.
For more information on price drop protection gimmicks, click here.