Oliver explains: Why getting multiple quotes for flights does not work...
…and what airlines can do to help people who want to
Imagine you want to clean your gutters, repair your roof or get a new front door. What would you do? Probably you would go to contractors and get three or four quotes.
Some will be low. Some will be high. With a bit of luck you will get a good job at a fair price.
So it is no surprise that when people are looking to buy air travel they think about going to travel agents and getting three or four quotes. It is understandable. They do not want to spend more money than they need.
Unfortunately getting quotes for air travel does not work. Or at least not in the way you might think it will. In today’s article I am going to explain why.
I will also explain why the same idea does not apply to tours, holiday packages and bulk deals. And at the end what airlines can do to accommodate people’s urge to seek better deals.
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This is the eighth article in my “Oliver explains” series. I take things that are either important tools in Revenue Management’s tool kit, sound a bit odd or seem complicated. Hopefully I will be able to make them sound simple.
Some readers might find these articles rather basic. If that is the case for you, then don’t worry, more mind-bending analysis will be coming soon. If you are here to learn, or would like a refresher, read on…
You can read the other seven here:
1. Why is Business Class sometimes cheaper than Economy?
2. How do airline overbooking algorithms work?
3. How is airline revenue accounting data used in revenue management?
Airlines release inventory to travel agents so they can make bookings
The first thing to understand about air travel bookings is that they are made by accessing and then securing an airline’s inventory of seats.
Airlines schedule flights and they have a certain number of seats available for sale on each plane. A Singapore Airlines A350-900 aircraft in it’s long-range configuration for example has 42 seats available in Business Class, 24 in Premium Economy and 187 in Economy.
A flight enters it’s booking window a little under a year ahead of travel. At this stage airline revenue managers will have decided how many seats they want to make available at a number of pre-defined price points.
Airline pricing systems are old-fashioned. They use the 26 letters of the alphabet to represent each price point. These are typically not arranged alphabetically, so for example A is not the highest price, B is not the second highest and so on.
Singapore Airlines’ arrangement is:
F & A = First Class
Z, C, J, U, D = Business Class
S, T, P, R = Premium Economy
Y, B, E, M, H, W, Q, N = Economy
Normally, the further to the right each letter is in this list, the lower the price.
These are called inventory classes, fare classes, revenue booking designators or fare buckets, depending on who you talk to.
In accordance with the Law of Demand airlines will expect to sell more seats, on average, at lower price points.
So, just an example across the year Singapore Airlines might sell 0.5% of it’s Economy seats at the highest price point in Y, 1.5% in B, 3.5% in E and so on. Those are just dummy numbers to give you an idea.
Revenue Management is the art of figuring out how many seats to hold back for higher prices when demand is high.
So for example three days before Christmas, the airline might not make any of it’s lowest fares available at all and restrict availability so that 5% of seats that day are sold in Y, 15% in B, 35% in E with maybe nothing at all in H, W, Q or N.
Meanwhile at less busy times of the year, a second Tuesday in February for example, the airline might not sell any seats at all in Y, B, E, M or even H. All the seats might be sold at the lowest fares.
Travel agents might see availability that looks something like this:
Y9 B9 E9 M9 H7 W3 Q1 N0
Members of the public can see the same thing if they access a service providing it. I recommend Expert Flyer.
The numbers represent the airline’s available inventory at the time a traveller is shopping. This means that at least nine seats are available for sale at the price points Y to M, seven in H, three in W, one in Q and none at all at N.
So if the fares are Q = £100, W = £200, H = £300 and M = £500, the airline will sell one seat only at £100, three seats at £200, seven seats at £300 and at least nine seats at £500.
Airlines will not show public travel agents the full number of seats available unless it is less than nine. This would be too confidential and competitors could capture this data to re-engineer a pricing strategy.
Some airlines, Emirates in Business Class for example, limit what they show to no more than seven seats.
A revenue manager at Singapore Airlines however will have the full picture. She might see:
Y187 B184 E125 M90 H7 W3 Q1 N0
This means that the airline has not yet sold any seats as all 187 of the A350-900’s are still available. Notice how the airline will theoretically sell every seat at the highest price, point Y, if that is what members of the public want to buy. But they actually only expect to sell three seats in Y if the flight is full and demand materialises as expected.
Travel agents must access & use up this inventory when making bookings
So let’s have our imaginary travel shopper approach five travel agents looking for quote. We will suppose for the sake of argument that they are a group of two passengers.
The passenger calls Travel Agent One. The agent books two seats. There are not enough in Q so they book one in Q and one in W. £300 total price to the agent and they quote £320 to the passenger.
