How do airlines determine ticket prices?

Promoting a comment to an answer - it's actually really really complicated! There's a reason why even Google can't give you an answer quickly, and why multi-city quotes can take such an age to run....

The best explanation I've come across of why this is, what goes into the complexity, what work there is in finding out the prices etc is given in this presentation by the folks at the ITA Matrix. There are a few maths-y slides, but much of it should be understandable by most people. Have a read, have a weep, then be glad that the ITA Matrix is available for free online to do the hard work for you!

There are different ways to determine the price of a ticket and it depends on different factors.

Every airplane has a different cabin(Y,Z,X,D...) and classes(first, business, economy...). Usually every cabin has a yield price, which is the amount of money the airline knows it has to make on every seat on that particular cabin to cover the operating costs. Obviously the airlines won't sell under the yield price, and it will expose to travel agents an ask price. The ask price is a function of different factors: seat available on the airplane, yield price, cabin, frequent flier numbers etc...

To tweak the ask price airlines have different systems, on the simplest case, they will close most of the available seats up to a couple of months before the flight, then open cabin by cabin on a per flight basis. Just before the departure they open a few seats that have a higher yield because they know they will sell them. What is interesting is that once they hit the yield price for the whole flight, they can play a bit more aggressively with the parameters to high revenue up.

There is no way to predict the price of a flight, usually there is enormous business intelligence put in place to get the better yield for a flight, historical data is checked and simulations are launched to find the better yield function that will get more revenues.

source: I used to work for Amadeus, one of the two biggest GDS systems in the world

I've worked in airlines and the process is as follows:

1. Airlines buy or rent some planes. They also have permits to flight at a given date and time over some route. They cannot just grab some plane and fly whenever and wherever they want.

2. If a jet costs as much as USD 150 million, and in 24 hours they can fly it for only 15 hours, the rest of time it must be on the floor for maintenance and passengers getting in and out of the plane. And only about 200 passengers per flight, you need to charge as much as USD 100 per hour of flight for only getting USD 100 * 15 * 200 = 300,000 per day or USD 9 million per month, so assuming there are no marginal costs for flying, you recover your money in just 2 or 3 years, if the planes are always full.

3. What happens if one airline decides to charge USD 1 less for each flight? Nothing! It is not important for a $1,000 or $100 flight. But if they decide to charge 10% less they will always be full. And of course that is what the airlines want. The only problem is that other airlines can do the same, and price wars only leads to industry bankrrupcy.

4. And of course you have heard about how many airline companies that were too big, went bankrrupt. United Airlines comes to my mmind. What did they do wrong? Once I travelled in United. I was the only passenger. So basically they were giving a USD 9 million experience for pennies. Was it nice? No, the attendant was not very nice, even if she had only to attend me, for some reason the employees didn't seem very happy. That is a sign the company has problems, because companies are made of people, and if people are unhappy, it usually means they feel underpaid. They give a bad customer experience, and if customers hate the company, you can be sure as hell they won't buy from that company again.

5. Sometimes I buy a ticket from one airline and when I get into the plane it is from another airline. As you can guess, the airline did not grab enough passengers and decided to redistribute them among other airlines. The airlines can sell seats between them, at discount prices of course. So in theory you could have an airline that has absolutely no planes. You just need some airlines to offer you flights on the cheap.

6. Well imagine you are the CEO of an airline. You want your planes to be full all the time. And you have this mechanism to keep the plane on the floor and still make money. Of course you should make more money when you actually take the plane off, isn't that obvious? Otherwise the incentive to not having planes would be too great. No one would fly. And you still need to fill the planes. You know some people plan their vacations ahead of time and they are very careful on how much they spend, because it is their money, while some people are employees and they need to be at a given time in a city for a business meeting. They plan ahead only a few days before. You charge them more, because they are making more money with the business meeting. And they don't care about the price, because it is not their money they are spending.

There is no such set of rules. Period.

Most airlines have a yield management department (sometimes called revenue management). The whole purpose of this department is to figure out how to set ticket prices to get the maximum revenue out of each flight. A lot of that is done manually (which is why they need a whole department for it, and often not a small one!)

There are of course some rules they use internally, but as soon as the general public figures out how to take advantage of such rules, the rules stop working for the airline, and they change the rules.

So as a consumer, it comes down to: there is no alternative to actually comparing prices.

Oh, and the various Web sites that offer to do the comparing for you? They usually don't include all airlines, or all fares, so you can still get a better deal elsewhere. Which fares do or don't show up on Expedia etc. is also part of what the yield management department does.

this is a very complex topic involving some very advanced CS algorithms and different factors. long scientific papers have been written on the subject. the simple explanation is that its a marketplace/ auction and prices are influenced by supply and demand. the basic price is related to airline costs such as equipment and fuel, taxes, airport fees. both supply and demand vary in complex ways. both supply/ demand are very dependent on time/ cyclical factors such as time-of-day, day-of-week, day-of-month, month etcetera (in other words the same distance or airport-pair costs differently depending on those). also the airlines are interested in revenue-maximizing algorithms which basically attempt to price tickets to achieve maximum profit. if the ticket is priced too high, too few are sold cutting into profits, if it is sold too low, there is greater demand but also less profit. etc

here are a few basic refs starting off with a 43p scientific paper by CalTech professors and a short analysis by a popular Math/ algorithms Phd writer Devlin.

• Dynamic Pricing in the Airline Industry / McAfee, Velde

• The crazy math of airline ticket pricing / Devlin

• Everything you need to know about dynamic pricing / Christian science monitor

• Airlines reveal ticket pricing strategies / Mercury news

Just a simple (and possibly obvious) observation. Airlines want to make a profit. They have expenses for each passenger, slightly lower expenses for each empty seat, and income from each sold ticket.

How much do they charge? As much as they think they can get away with. They must charge no more than the competition, and no more than the reservation price of particular customer.

Business travelers can pay more than tourists. They want to travel on working days and get home by the weekend. They buy their tickets on short notice. So they're made to pay for that comfort.

This answer is moved from a question which is being closed as duplicate.

There is no excuse for it, bad for environment as people land and take of more often and quite often also travel more land miles to make use of a cheaper airport.

But Airlines do it as they can get away from it.

I have heard it explain as there is a big difference in costs the airlines pay for a transfer passenger compared to a long distance passenger leaving from or arriving at the airport. While short distance flights are on the lower cost scale.

One time several European friends all flew to Boston, USA, and all had comparable lenght (and days) of stay. The final ticket prices were about the same, within €50 from each other, bought around the same time.

• One flew Bristol (BRS), Amsterdam (AMS), Boston (BOS).
• One flew Amsterdam (AMS), Paris (CDG), Boston (BOS).
• One flew Amsterdam (AMS), Rome (FCO), Boston (BOS).

At that time the flight Amsterdam - Boston was about €300 more expensive. As was London (HTR) Boston, if not more expensive.

I personally feel that the system of dropping the price when adding a leg should be stopped, but till a big country or a series of countries, or more likely both at the same time, make laws against it airlines will continue. So your best option is to search well.

By the way, in Paris one flight was delayed so arriving in Boston 3 hours late. On the way back the incoming flight was late in Paris so running and rushed few minutes. And in Rome luggage got 'lost', to be delivered 4 days late in our destination town a few hours drive away.
So it is worth considering to pay more for a direct flight.