Airline Pricing Algorithm Works on ‘Maximize Profit” Objective for Every Flight

 

Airlines price their tickets dynamically, based on an algorithm which seeks to bring out the best price of a ticket at a point of time considering that the airline has to maximize its profit. That is the ultimate goal of the algorithm. In going about this task, the algorithm seeks to balance the price of ticket and the number of seats in a flight. The price influenced by current demand, number of seats available and the time at which booking is done. A complex interplay of these and certain other factors is considered for bringing out the best price of a plane ticket.

We can briefly discuss some of the special case scenarios and try to understand how does the algorithm operate to gain maximum price in these situations?

Bumping-Offloading of Passengers

The term ‘bumping’ refers to deplaning or not allowing passengers to board an airplane in case the plane is overbooked against their wish. The ones who volunteer to off-load on their own are offered vouchers or incentives for taking the next flight. This practice of bumping is quite rare. However, this is not the result of an impulsive action by the airline. Rather, it is a very well calculated move and a derivative of the algorithm which works to state that it is okay to take this risk since it will impact an insignificant number of travelers on annual basis, but will help airline in maximizing revenues.

Airlines do endeavor to fill all their seats, but not by offering the seats at lowest prices. Rather, it seeks not to lose out on those passengers who were willing to pay a higher sum for that flight. So, the modeling of algorithm is to ensure that the seats are filled but, at the same time, maximum revenue is also raked in. The bet of price with respect to available number of seats at a given point of time has been successful in predicting the fares till now and the carriers have made good use of it.

Even as the passengers are turned away, the algorithm seeks to ensure that the high paying passengers are not turned away or their number is as less as possible. At the same time, it takes care of the situation where a passenger cancels the seats and cost of it to the airline since they have also turned away passengers for that passenger who is now cancelling the flight.

Protecting or Holding the Seats

If the spill, turning away of passengers, has to happen and it is inevitable, then it would be a good idea to turn away low-paying passengers rather than the high paying ones. To meet this objective the airline tends to reserve some of the seats for those higher paying passengers. These held-up seats are released at the eleventh hour, generally 24 hours preceding the flight departure time.

Bucket

In order to ensure that just the right number of seats are protected, this algorithm takes into account the full capacity of a flight, the load factor and the changing levels of demand. The demand further varies according to the date of flight, origin and destination and time of the day. For example, if there are flights which are very popular, it will be good for the carrier to keep more protected seats that are to be sold at highest price at short notice.

Understanding this algorithm makes one think that since there is a pattern to pricing, defined by the algorithm, is it possible to predict the best time of booking cheap plane tickets? Also, if the airline hold the seats for last minute release, why do people feel that the last minute flights come at heaviest discounted fares?