How Do Airlines Come Up With These Ridiculous Fares? (Ask Cranky)

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  • About: 2 months ago
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How Do Airlines Come Up With These Ridiculous Fares? (Ask Cranky) - World News

Airline pricing is always something that captivates and confuses people, and I love talking about it. I received this great question with a pricing example from a reader which gives me a good excuse to ramble about the dynamics at play. As you can guess from the dates in here, this was sent a couple months ago, but I’m just getting around to posting it now.

I read your site regularly and with great interest and would greatly appreciate you [sic] view on the following subject regarding hidden city tickets:

I’ll use the following example: Detroit to Cincinnati on Delta, may 3, one way, leaving at 7:10. Prices are from Delta’s own site at time I wrote this.

Nonstop Detroit to Cincinnati – DL4509. $358.

Hidden city: Detroit to Dallas: DL4509 to Cincinnati connect to DL4250 to Dallas $121.

DL4250 on its own Cincinnati to Dallas is $98.

Now I acknowledge that no one would book the connecting flight if they could, because Delta has a non stop to Dallas (DL3748) leaving at 7:10am for just $113.

So here is my question.

The two legs on the hidden city journey priced together is $121. The two legs priced separate ($358 + $98) is $456. The nonstop flight that the two compete with is $113. The non-stop I want is $358.

I think … they are grossly overcharging for the Detroit to Cincinnati flight. Way more then demand would indicate. This to me is taking advantage of having monopoly power. Let’s remember that airlines themselves are not really a free market. There are limits in airports (with public funds) and airspace. So traditional free market does not apply.

Delta says they can take me to Dallas on two flights for $121. If this is profitable, there is no need to upcharge the Detroit to Cincinnati flight. If it’s not profitable then why offer it at all? Why not prohibit the connecting flight so they have space to sell the $358 flight plus $98 flight?

If the $358 is really market price they should have no problem selling it.

Thank you for your time and opinion. -Jeremy

Alright, there is a whole lot going on here, and I even edited the question, because it got even deeper into the weeds originally. The basic premise of airline pricing is straightforward to explain. The airlines try to maximize the amount of revenue they can generate on each route, from origin to destination, regardless of connecting point. This, of course, means that tickets are sold from origin to destination only, and you can’t use a partial ticket.

In general, airlines charge more for nonstops, because that’s one of the few things for which customers have historically been willing to pay a premium. From Detroit to Cincinnati, if you want to fly nonstop, you fly Delta and you pay a premium for it. If you’re willing to connect on another airline, you can pay less.

This is where hidden-city ticketing comes in. Detroit to Cincinnati is expensive, but Detroit to Cincinnati to Dallas is cheap, because there are a ton of airlines that fly that route with a connection. You may want to buy that cheap ticket to get to Cincinnati and just not board the second flight, but the airlines don’t allow that. If they did, it would blow up the entire fare structure, which is fairly fragile anyway.

This is where you probably start wondering… well if airlines can charge more for nonstops, then why is it so cheap to fly from Detroit or Cincinnati to Dallas on a nonstop? Well, this is where the competition starts to warp things. In the former, you have Spirit flying the route (as well as American and Southwest to Love Field). In the latter, you have Frontier (and American). So Delta no longer has the ability to set its prices. It becomes a price follower and has to match, at least on some flights. (Note that Jeremy points out that the flight he wants is significantly more at a different time of day.)

The reason for this is because, whether you want to believe it or not, a ton of people choose their flight based on price. And time and time again we’ve seen that when legacy airlines don’t match, the low cost carriers grab a toe-hold and grow from there as people flock to them. Now the legacies aren’t willing to give an inch.

This makes for a perverted fare structure where the old-school high fares exist until competition comes in to knock them down. It’s hit or miss in every market, but this isn’t a new phenomenon. Southwest started knocking down legacy fares 40 years ago. The practice has just expanded greatly since that time as many low cost carriers have continued to expand their reach.

And this is why there’s a new focus on the value of smaller connecting markets. I wrote about how United was really looking at domestic connections after its President Scott Kirby took his knowledge from American and its Charlotte hub. Small cities have far fewer passengers, but the fares are a lot higher because they’re too small for most low cost carriers to enter.

That means that these markets are the last bastion of the old fare structure. Detroit-Cincinnati is one of the dwindling number of larger markets that don’t have low cost carrier service. That time will come eventually, and we’ll be left with one fare structure for big markets and another for little ones. That will not only confuse people but it will further hurt small city demand.

So if you wonder why you see so many different kinds of fares in similar markets, it’s because there is no coherent pricing strategy in place. There are the remains of an old strategy, dented and dinged from years of the airlines losing pricing power to their low cost competitors.

I’ve had a lot of discussions with people about how different structures could work. I continue to be obsessed with the concert ticket model (I even did a podcast about it), but I’ve yet to figure out how to make it work when connections are in play. But some day, there is going to be a better solution. It’ll just require someone willing to take a risk. The problem is that when legacy carriers make a bold pricing move, they’re rarely rewarded for it.





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