Searching for a cheaper flight? There’s no secret trick.
Buy on a Tuesday. Search in your browser’s incognito mode. Use a VPN to pretend you live in Suriname.
“There are so many hacks out there for finding cheaper airline tickets,” says Assistant Professor Olivia Natan. “But our data shows many of these beliefs are wrong.”
Natan and colleagues from the University of Chicago, Yale, and the University of Texas at Austin looked deeply into how prices are set at a major U.S. airline. The system she found, which is representative of airlines worldwide, was strikingly at odds with what many economists would expect—and most consumers assume.
Substituting convenience for price
When people search websites like Google Flights or Kayak, a range of different flights from the same airline appear. Travelers tend to balance convenience and cost: The price of one flight might push people to select a slightly less convenient but cheaper flight.
“But airlines don’t consider this kind of substitution,” Natan says. They set the prices of seats on each individual flight on a given route separately, “even though changing the price on one flight will affect the way people think about all their options.”
A small menu of preset prices
Perhaps most surprisingly, airlines also don’t incorporate the prices of their competitors into their automated price-setting. This behavior, Natan explains, is the result of a specific pricing heuristic—or decision-making shortcut—that airlines use called Expected Marginal Seat Revenue-b. The use of this, the researchers show, results in another outcome that consumers may not expect.
Despite how it may appear when searching flights, airlines have a fixed and relatively small number of prices that they assign to tickets on each flight. Unlike other consumer sectors, where pricing can be adjusted down to the penny, airlines operate with large gaps between each possible price—sometimes upwards of $100. They may sell the first 30 economy tickets at the lowest price, then the next 30 tickets at the next possible price, and so on.
“Airline tickets are sold through global distribution systems that make sure a travel agent in Wichita or Miami sees the same price you do on your computer,” Natan says. This system emerged from an industry alliance to facilitate inventory management. Other travel products, like hotel rooms, cruises, and car rentals, do the same. The downside is that airlines are relatively unresponsive to real-time changes in cost, as the next discrete fare is often a significant jump up.
Despite how it may appear when searching flights, airlines have a fixed and relatively small number of prices that they assign to tickets on each flight.
Lack of coordination across departments
One of the strangest discoveries from the research relates to the process airlines use to set their prices. To an economist, Natan explains, there is never a reason that firms would not raise prices if the increase assures an increase in revenue. But the set of possible prices chosen by the pricing team nearly always includes an option that is too low.
“We found they could make more money today by selling fewer tickets at higher prices and not foreclose future opportunities,” she says. “In practice, they choose the menu of prices without using their internal demand predictions.”
Interestingly, the revenue management team corrects much of this underpricing. Before tickets go on sale, this team makes demand forecasts that determine final prices. These forecasts are routinely inflated, reducing the number of underpriced tickets shown to consumers by roughly 60%.
“We find that these prices are a consequence of teams from different departments choosing the best pricing inputs when they are unable to coordinate,” Natan says. Or, airlines might not maximize short-term revenue to build customer loyalty or avoid regulatory scrutiny, she speculates.
Over the next several years, Natan says, airlines may start to adopt more dynamic pricing platforms, and non-business travelers may benefit from these changes. But for now, the hunt for a trick to find lower fares is largely futile. “What I can say is that prices do go up significantly 21, 14, and 7 days before a flight,” Natan says. “Just buy your ticket before then.”