Why Do Plane Tickets Vary so Widely in Price?

Frequent travelers know there is much greater elasticity of demand for coach-economy class seats than there is for seats in the first-class section of an airplane. In other words, the variation in price for coach class seats on an airplane is much greater than that for first-class seats, which tend to remain steady in price. Not surprisingly, the highest coach fares for travel between two points during a given period will be assigned to the most restrictive itineraries. For instance, a round-trip ticket from New York City to Paris that required a next-day departure with a return the following day would cost the traveler a pretty penny. Of all available, coach round-trip fares from New York City to Paris, the one assigned to this particular itinerary would be the most expensive.

However, the price for a coach seat drops quickly as more flexibility is introduced into the itinerary criteria. A round-trip coach fare from New York City to Paris for a next-day departure with a week long stay will be significantly less than a round-trip ticket with a next-day departure and only an overnight stay. Consumers can expect the ticket with the week-long stay to cost only about two-thirds as much as the ticket with the overnight stay.

The price will plummet even more when travel arrangements are made a month in advance. A round-trip coach fare from New York City to Paris with a one-night stay which is booked a month ahead of time will cost only about half as much as a ticket for the same itinerary booked the day before departure.

Meanwhile, an individual flying coach from New York City to Paris who was willing to book a month in advance and commit to a week-long stay would pay about 40 percent of what the airlines would demand of a traveler with a much more restrictive itinerary that required him to leave the next day and return the day immediately after.

Prices for round-trip first-class tickets remain relatively stable. If tickets are booked the day before departure, the cost of first-class seats will vary little, whether the traveler opts for an overnight stay or a week-long stay. Round-trip tickets will drop modestly in price when travel arrangements are made a month in advance with a longer stay.

So why do ticket prices for the same itinerary vary in this way? It makes sense that the airlines charge more for coach-class tickets purchased a day in advance. A traveler who requests a next-day departure is generally "more desperate." Since most air travel arrangements, particularly those that involve a trans-Atlantic flight, are made at least a few days-and usually weeks or months-in advance, it is reasonable to assume that individuals booking travel for the next day have an urgent and unavoidable, perhaps unexpected, need to take the trip. Thus, the airline has the traveler "over a barrel." It is likely that he "must" travel tomorrow and will thus be forced to accept a much higher price than if he had the ability to introduce more flexibility into his travel arrangements. Likewise, travelers who take a trans-Atlantic flight only to return the very next day after a short overnight stay are generally scheduling a quick return because their schedule and other external factors are compelling them to do so. In other words, an individual who books a next day flight with an overnight stay generally constrained to do so by his circumstances and has no other "choice" with respect to his travel arrangements. He thus has much less negotiating power in relation to the airline. Because he must depart and return at a particular time, he does not have the ability to change the dates of travel in order to obtain a better price. Negotiating power is especially low for the traveler who must depart the next day because he does not have the time or leisure to either search extensively for a better fare at another airline or to delay in the hope that the fare will come down.

Unlike the economy-class traveler, the first-class traveler generally has little flexibility or negotiating power even when he books a week -long stay or makes travel arrangements a month in advance. While the majority of coach flyers are traveling for pleasure or other personal matters over which they exercise at least some scheduling control, many first-class flyers travel for business purposes. Those traveling for business meetings are not usually able to exercise much, if any, control over the timing or venue of their meetings or the length of their stay. They must travel at a particular time in order to meet their business obligations in the city of destination, and they must return at a particular time in order to meet their business obligations at home.

When a coach traveler books a round-trip flight to Paris a month in advance, he can often be flexible in terms of the dates of his travel because he has time to rearrange other items in his schedule to accommodate his vacation or leisure plans. However, even when a business traveler books a first-class round-trip as much as a month in advance, he is generally already tied into his travel dates by the demands of his profession, his own schedule, and the schedules of his business associates.

The one exception occurs when a traveler books a first-class round trip with a week-long stay a month in advance. Then there appears to be much greater elasticity in demand and price drops. One reason for this may be that many first-class flyers who book week-long trips in advance tend not to be business travelers but affluent vacationers or other leisure flyers who simply prefer to travel in superior first-class accommodations. Those who fly first-class on leisure trips simply because they want to have more flexibility with respect to their travel arrangements than do business travelers, no matter what class they fly. In addition, business travelers who plan week-long stays in advance often have more flexibility in their schedules than those who book travel at the last minute. Given the delay between booking and travel, these business travelers have more time and opportunity to rearrange their business meetings to accommodate a cheaper itinerary or to "shop around" with other airlines. Thus, an airline charging the highest fare to a business traveler booking a first-class round-trip with week-long stay a month in advance would risk being underbid by other airlines and losing the passenger's business altogether.

Even though the elasticity in demand for first-class seats increases marginally when tickets are purchased in advance and round-trip itineraries include longer stays, elasticity in demand for coach-class tickets remains greater at all levels and under all conditions. Even when round-trip tickets with week-long stays are purchased a month in advance, the percentage of the difference between the cost of those tickets and the highest fare for the most restrictive itinerary (a round-trip ticket with a next-day departure and overnight stay) is greater for coach-class flyers. A round-trip coach-class ticket purchased a month in advance with a week-long stay is only 40% of the highest fare, while a first-class flyer purchasing tickets for the same itinerary will pay 50% of the highest first-class fare.

A constant in airline pricing is that first-class seats, no matter the itinerary details, cost significantly more than coach-class seats. A first-class traveler who purchases a round-trip ticket with next-day departure and an overnight stay pays two-and-a-half times as much as an economy-class traveler purchasing tickets for the same itinerary. The first-class traveler pays three-and-a-half times the cost of a coach ticket when arrangements are booked a month in advance and the itinerary includes a week-long stay. The question is whether the higher costs incurred by an airline for offering first-class seats justify the vast pricing differential between first-class and coach-class fares.

It almost certainly does cost the airline more to accommodate the first-class passenger than it does to accommodate the coach-class passenger. First-class passengers have larger seats and roomier accommodations; a first-class passenger may take up to 50% more room on an airline than a coach-class passenger. To some extent, then, the airline is justified in charging the first-class passenger more because accommodating first-class passengers means accommodating (and collecting payment from) fewer coach-class passengers. In addition, first-class accommodations often come with perks, such as better food and in-flight on-demand entertainment, which present an additional cost, which the airline is justified in tacking onto the fare it charges the first-class flyer.
However, it is doubtful that these costs account for the entire difference between coach fares and first-class fares.

The significant differences in airline tickets bought at different times and with different itineraries, for instance, different lengths of stay, indicate that the airlines do not simply charge passengers based on the costs that they incur by transporting the passengers. Rather, a large portion of the price of an airline ticket appears to be dependent on what the passenger is willing and able to pay. In other words, the airline charges as much as the market will bear, even when the price is far higher than the actual costs incurred by the airline. The airline takes advantage of demand by engaging in dynamic pricing, adjusting prices to market conditions and consumer preferences so as to extract the greatest amount possible from customers based on the amount that they are willing and able to pay for an airline ticket. Thus, the airline drastically increases prices when demand is high and supply and choice are low and the customer has little negotiating power and lowers prices when demand is lower, the market offers a wider variety of product choice, and the customer has the ability and the incentive to "shop around" for a bargain. Prices are highest right before travel time and cheaper when tickets are bought ahead of time. Likewise, fares will increase during peak travel times, whether those peaks are measured by the day, week, month, or year. For instance, early morning flights may be more expensive that mid-afternoon or evening flights, and tickets bought for holiday travel will be costlier than those bought in "off-season" months.

With respect to first-class fares, the airlines engage in a form of modified price discrimination, which involves setting different prices for a product for different market segments or classes of consumers. Although there are differences between a first-class seat and a coach-class seat, these differences do not account entirely for the wide variance in price. The airline markets its coach-class seats to bargain-conscious travelers, who generally have modest or middle-class incomes and who are willing to make changes in their itineraries in order to secure a cheaper ticket. This market segment is extremely price-conscious and price-sensitive. On the other hand, the airline is marketing first-class seats to a market segment that has significant disposable income; passengers in this market segment often care more about luxury, comfort, and personal convenience than about bargain pricing. Therefore, the airline can "get away with" charging passengers in this market segment much more for first-class accommodations such that the price differential between first-class and coach fares is greater than the differential in actual value between a first-class seat and a coach seat.

In charging significantly more for first-class seats, the airlines are also engaging in premium pricing. That is, in order to create a "mystique" regarding first-class accommodations, the airlines charge significantly more for a first-class seat than for a coach-class seat. By doing so, the airlines are attempting to convince the consumer that first-class seats are indeed highly desirable by delivering the unspoken message that "first-class seats must be great because they cost so much." Under the theory of premium pricing, travelers will associate first-class seats with high quality simply because they are inclined to believe that an expensive item is far superior to an inexpensive one. Thus, airlines appeal to the vanity of consumers who can afford first-class travel. They are also able to persuade coach flyers with frequent flyer miles to trade in their points for an upgrade to first-class rather than for a certificate for discounted or free travel, which would undoubtedly cost the airline more than a simple upgrade.

In addition, because any particular travel market will be served by numerous airlines, airlines most definitely engage in competition-based pricing. That is, ticket prices are largely based on the pricing levels adopted by competitors, and airlines attempt to match the prices offered by their competitors. Because the market is saturated with vendors who can offer a comparable product, the airlines must be careful not to charge more than competitors because then they will lose passengers to the competitors who have underbid them. At the same time, although an airline may try to eat into the market share enjoyed by a competitor by lowering price, it must be careful not to lower price so much that it begins to diminish its own profits. Thus, although there may be a great variance in the prices of round-trip tickets offered by a single airline depending on the passenger class, the length of stay, and the time between booking and travel, prices generally stay constant relative to those offered by other airlines after controlling for all these factors and conditions.