I don’t understand air fares
Posted on: December 5, 2008
I’ve been looking at air fares for overseas travel recently and somethign stood out. When you stop over in a city it costs a whole lot more to stop over for a few days than it does to just transfer flights and pass through. I would have thought that getting to your final destination faster was something people would pay for. Yet, the longer you’re happy to take over your trip, the more you end up paying!
Are there costs to a stop over that I’m not aware of? It doesn’t seem as if it would cost the airlines any more to put you on a flight a few days after you arrive at a destination. Indeed, I would guess that people who want to stop over and explore a city are far more flexible about the timing of their flight than those who just want to pass through as quickly as they are able. In that case, the more inelastic demand for short stop-overs should result in them costing more.
I’m sure that airlines have thought about this in some detail and there’s a good reason for it. So can anyone explain to me why staying in a city for a while is so expensive?
UPDATE We’ve had a very helpful email from a reader that sheds some light on the problem. Apparently I don’t understand because the fare system is so complex that understanding it would require solving currently unsolvable problems in computer science. It doesn’t really shed any light on the issue, but at least I don’t feel so daft any more!
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9 Responses to "I don’t understand air fares"
December 5, 2008 at 2:33 pm
Couldn’t we state that there are effectively separate markets for the two types of travel – with stopovers and without.
For some customers these aren’t good substitutes so they may have themselves a fairly inelastic demand curve. In this case wouldn’t we see airlines charge different prices in order to price discriminate between passenger types?
December 5, 2008 at 4:21 pm
I think airline pricing system – believed to be the most complex and most advanced – is like derivative pricing.
Its best not use any sophisticated algorithms and simply go with 2 or 3 level structured fares.
The current pricing depends on creating inconvenience for customers who are paying less.
It should be other way – incentivising customers who are helping me (airlines) fill capacity!
December 5, 2008 at 4:23 pm
Just to add – the way they create inconvenience is based on their assumptions – so sometimes we can still beat the system if we are flexible – but only sometimes!
Anyways – you have a great blog here I am a regular reader – good stuff!
December 5, 2008 at 5:09 pm
Steve and Matt:
The price discrimination could certainly work both ways. I really don’t know enough to know which way it would go. I guess the email that we got suggests that it may not be amenable to such simplistic analysis.
However, the article only said that finding the cheapest fare is tough, not that the construction of the initial system is complex. Perhaps we can infer somethign about the elasticities from this pricing.
Rahul:
I certainly hope it’s not all based around creating inconvenience for me, but it does often feel like it! Thanks for commenting and reading our blog 🙂
December 5, 2008 at 6:00 pm
As an airline you can probably justify a little extra from the point of view of a passenger handling charge…checking in a second time, retrieving your bags and processing through security a second time (I presume airlines pay more for new passengers than transit passengers). But I’m sure they are also clipping the ticket on the fact that to many leisure travellers the stopover has value.
December 8, 2008 at 10:03 am
A related question – should you pay more for flights at the last minute?
If you have to go somewhere unexpectedly you may be willing to pay more, but conversely seats might stay empty because last minute bookings are more expensive.
Airlines used to offer student stand-by fares which were half price. The risk was you might not get a seat because you only knew if you had one at the last minute when half a fare was better from the airline’s point of view than none. But if you didn’t have to be somewhere urgently the savings justified the uncertainty.
December 8, 2008 at 10:18 am
I think from an airline’s perspective, at the last minute before a plane leaves all your costs are sunk and thus they just want “bums on seats”. This is why we witness things like student standby or Ryan Air’s famous $1 flights.
The demand side effect you mention definitely exits though which is why prices for a specific flight will rise as you get closer to the departure date. However, once you are getting to hours before the flight you would expect to see prices plummet as the “bums on seats effect” starts to dominate.
Apparently Tim Hazeldine from Auckland Uni has done some empirical work which documents this type of pattern overseas (Canada I think?).
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December 5, 2008 at 1:31 pm
well I think there’s two things here, how far away is it that you are travelling?
If you are planning a trip significantly in the future, then you are much less dependent on time and more dependent on comfort. A longer stop over of a few days is more comfortable, hence you are willing to pay more for it.
The arguments you have offered are for the inflexible business traveller who has to leave short term, and doesn’t desire a long, or any stopover at all.