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Airline pricing: Science mixed with a bit of human psychology

  • Article by: CATHARINE HAMM
  • Los Angeles Times
  • November 17, 2012 - 1:18 PM

Let's say you're interested in a round-trip ticket between Los Angeles and Tokyo, so you search on various airline sites and travel sites. Could the number of inquiries about this specific route on a specific day and time show up as increased demand and cause the fare to rise as a result?

Before we get to the answer, let's talk about yield management.

You're probably thinking, "Do I need a course in Econ 101?" No, you don't. But you do need to know why an airline ticket on Monday is $200 and by the next Monday is $350. The culprit often is yield management (although you might also factor in fuel prices).

George Hoffer, who teaches economics at the University of Richmond in Virginia, explained the basics to me. "Yield management is, in essence, a more sophisticated term for the age-old practice in economics called 'price discrimination,' charging different prices to different people for essentially the same good or service without cost differences justifying the price differential," he told me in an e-mail.

That means that if you're a business traveler who suddenly has to go to Miami from the West Coast, you're probably going to have to pay more than the leisure traveler who booked his ticket months ago. If you're the business traveler, you need to be there at a precise moment, and you'll pay for it. It's all about maximizing revenue, which evolving technology has made easier.

"Computer technology has made this system of pricing a science," Hoffer said.

The system also has, perhaps, an element of gaming, said Henry Harteveldt, airline and travel analyst at Atmosphere Research Group in Cambridge, Mass. The airline is betting on whether demand will remain unabated even after low-cost seats are gone.

Harteveldt said it's unlikely that such an inquiry about a Los Angeles-to-Toyko route would trigger a fare increase. "Any price differences [the person] would see ... would reflect the number of seats booked versus the number unsold."

That doesn't mean that websites aren't paying attention to what you're paying attention to. Charlie Claxton of Produxs.com, a website user experience design firm in Seattle, knows that information you reveal, intentionally or not, to a site may become part of your online shopping experience.

Even if you're not giving out private information, how you react on a website speaks volumes about you, Claxton said. Let's say you see an airfare listing that says, "Only one seat left at this price." If you're a person who has an aversion to loss, that just might be what pushes you into the purchase. So how do you know if it's true or if it's just a site trying to get you to buy the seat?

You don't.

The way airlines sell tickets isn't at the point where they can predict completely what makes you buy. For now, it remains unnerving thinking that complex mathematical formulas, sprinkled with a little bit of pricing pixie dust, may determine how much you're going to pay for your ticket. Oh for the days when the flying, not the buying, was magic.

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