How airlines decide how much to charge for a plane ticket

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By Thad Moore

Back in the 1970s, figuring out the price of a plane ticket was pretty easy: No matter what airline you took, the price was the same.

The government set prices that were dictated mostly by the length of the trip, and airlines competed for business based on other factors, such as service or amenities.

But that all changed in 1978, when Congress deregulated the airline industry.

Since then, there hasn’t been a lot the government can do about the price of a domestic airline ticket and the number of airlines has shrunk dramatically. Now, the Department of Justice is investigating whether that’s led to collusion in the industry.

[Justice Department investigating potential airline price collusion]

These days, ticket prices are way more complicated. Coming up with tricks to snag a cheap seat is something of a cottage industry, and Web sites that compare options are, well, an actual industry.

Some of those factors make sense, such as the price of oil or the length of the flight. After all, jet fuel is the most expensive cost in running an airline, and labor comes in at No. 2.

[The future of air travel is garbage]

But others are trickier, such as when you fly (Tuesday, Wednesday and Saturday are the cheapest bets, Rick Seaney, the founder of FareCompare.com, told Fox News recently) or where you sit (middle seats are cheaper).

That gets to the real factor that drives prices: Airlines will charge whatever you’re willing to pay.

Plane tickets are the textbook example of what’s called dynamic pricing, the idea that businesses can make more money by changing their price based on customers’ willingness to pay. Airlines depend on complicated computer algorithms that try to figure out how much a customer is willing to shell out for a flight.

Someone buying a ticket the day of a flight, for example, probably needs to get where they’re going, and airlines will charge them a premium for it.

That’s also why plane tickets have stayed high even as oil prices have plummeted. Fuel accounts for about a third of the cost of running an airline, but when oil prices fall, less than half of the savings are passed on to consumers, researchers at the fare-tracking site Hopper found.

[Airlines are making record profits, but don’t expect a cheaper seat]

The other key factor: competition.

Back in 2010, The Wall Street Journal tried to make sense of airfare.

At the start of that year, U.S. Airways was the main airline flying between Philadelphia and Boston, and it charged an average of $684 round-trip. But when Southwest got into the game and started flying that route a few months later, prices plummeted: The most it would charge was $281.

That’s a difference of $400 in just a few months.

Basically, airfare comes down to economics – just an especially complicated breed of it.

As former American Airlines executive Rob Britton told the Journal, one philosophy underpins what airlines charge for a ticket: “Charge what the market will bear.”

At least that’s how it is supposed to work. The Justice Department said Wednesday that it is investigating “possible unlawful coordination by some airlines” that may have kept prices high.

Originally seen on the Washington Post.

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