Why airlines don’t drop fares last-minute even when they have a bunch of empty seats
Every time we check for flights for our desired destination, we tend to go back and forth, think twice, check other websites, and all sorts of things before we make that actual purchase. We want to make sure that we are getting the best deal, that hidden gem somewhere in the vast online jungle. Usually, this entire process takes days or even weeks — when we’re feeling lazy. For the most part, we see varying fares for the same origin and destination, sometimes changing significantly. We all have our own set of stories when we lost that “sweet deal” some time in the past. Ever wondered why this is happening? Do you actually believe that somebody bought that ticket for that fare and nothing was left for you?
If we take a trip down memory lane, airlines weren’t selling tickets in this manner. The government used to dictate the fares, considered them as a utility, and they just competed based on service. Eventually, over the years and for various reasons, things went bad. Economics is one of them. This led to deregulation in the 1970s. When airlines were made free to strategize their own pricing, they became more competitive — especially when new entrants came in. Still, this doesn’t answer the question: “Why?”
Imagine you have 100 apples all stacked inside a wooden crate, selling them for $5 each. You’re all good and fine… until this other person, a few blocks away from your spot, also has 100 apples and starts selling them for $4. You’re panicking! Sales are dropping! What else can you do? Apples don’t last forever! Now what?
If the case was different, say you had multiple wooden crates instead of one, would you agree that the possibilities, suddenly, are endless? Not merely because you want to make more money as a merchant, but also, you just want to compete with that other person who’s selling it for 4 bucks. You could still sell some of your apples for more. You could place some crates in different locations — some near posh restaurants, some near schools, and others maybe even in bus stops. You think about pricing them differently and wonder how much your customers in these various locations are willing to pay for, depending on factors like, how temptingly shiny the apples are, how convenient the location of your apple stand is, and even how bored or hungry they are at the moment of purchase. Would you rather have this possibility of earning more or would you just sit and sulk, jealously wondering how the other guy could have sold it at $4?
This is where it gets interesting. In the real world, airlines need to survive. They need to consider other factors, not only the competition, but also their own service, size and number of planes, cities to fly to, and a whole lot more, but you get the point. Honestly, it’s extremely complex and painful. Seats, just like apples, also expire. They’re worth nothing as soon as the planes fly.
Airlines realized that by creating differentiators between tickets (although they’re just selling the same exact physical seat), they could be more flexible. This is not to compromise people, but to segmentize them based on specific needs and what matters to them. Basic differentiators are options like luggage or no luggage, direct flight or not, etc. More complex ones involve time and day of departure: 6 or 7AM flights on a Monday attract more business travelers — they all have to be in their office on time, which means fares are likely to be higher.
With all these complexities and strategizing, do they end up selling all their seats? No. Think rotten apples. In fact, 20% of their apples expire. If they were selling real apples, somebody would have been protesting by now for all the apples they waste. Why not do a massive SALE? Can’t. People are smart. They will eventually learn to wait for the sale of those about-to-rot-but-still-okay apples and drag down airline revenues. Next thing you know, there would be no more flight attendants and water is available for self-service at the back. We all know how to use the life vests anyway. Duh, we had them when we were five… Do we really want rotting apples then?
As much as they want to sell these empty seats for peanuts, they can’t, because of the exact same reasons I mentioned above. If they did, yes, they might generate more revenue today but over time, it will not do them any good. Considering how thin their margins are today due to intense competition and high operating costs, there’s no room for short-term gains. It’s a long-term play: forecasts, analytics, optimization methods — you name it. If they miss their estimates, I don’t think physically moving five seats from plane A to plane B is an option up their sleeves.
If they could sell one seat for a million dollars and leave the rest empty, they would. But they can’t, so instead, their goal is to balance the number of high paying and discount travelers for every flight in such a way that they could maximize revenue. However, we don’t live in a perfect world. Actual demand still misses forecasts. In the end, an empty seat is an empty seat and they can’t do anything about it but write it off as opportunity loss.
“You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”
― Bruce Lee