https://www.ibm.com/case-studies/delta-air-lines
Two people board the same flight. One paid $140 for the flight while the other spent 90 dollars. However, there isn’t much difference because they are riding the same plane, landing at the same time, and waiting at the same carousel for their bag. The only difference was they bought the same tickets at different times, and within the airline industry, that is the one thing that matters most.
Most of the goods that we buy as consumers have a reason behind the price; most commonly, prices are influenced by factors such as cost of production, supply, and demand. While airline tickets are not an exception to this notion, the pricing works differently because airlines deal with a fixed number of seats on every flight. Certain products that we buy, such as milk, eggs, and fresh produce are perishable. Unlike clothes, they can’t be marked down to a lower price two months after they don’t leave the shelves. Airline tickets work in a similar way; unlike most goods, an unsold airline ticket loses its value completely once the plane takes off. This is an example of perishable inventory. Simply put, there is no clearance rack for flight tickets, so once a plane leaves, that empty seat can never be sold again. Another reason why airline prices work unusually is that the cost of filling up an additional seat on an airplane is relatively low. Airlines already commit to the cost of crew, fuel, and gate fees, and the aircraft a year in advance. Adding one more passenger adds only relatively small costs such as fuel usage. However, these reasons do not mean that airlines should sell their seats at any price. Since airlines do not know how many passengers will want a seat or how much they are willing to pay for it, they always need to consider the opportunity cost of selling seats at a lower fare when demand from higher-paying consumers may increase closer to the date of departure.
Every seat on each flight is divided into fare classes, and airlines decide how many to release to the public. Selling a fare for cheap doesn't maximize revenue, but it rather prevents a seat from going to waste. That same seat is now unavailable to another person who would have paid double two days after. Therefore, airline prices run backwards then regular commercial businesses. Fares frequently rise upwards towards the departure date rather than falling. Since the last-minute buyers are most often business travelers who can not move their trip, their demand is inelastic, meaning that airlines always save seats for them expecting that some flights will fly empty.
In order for airlines to sell identical seats at different prices, they must prevent passengers who would pay more from buying the cheap one. This pricing strategy is called price discrimination. However, prices can’t separate different types of consumers by themselves. Thus, cheap fares are met with specific conditions before consumers purchase each ticket; they must book 3 weeks in advance, accept that changes are expensive, board last, and pay for every bag that they bring. These conditions exist not to raise airline revenue, but to sort passengers. A businessman traveling on a Tuesday to Thursday trip will not accept a nonrefundable ticket for a meeting that might be moved to a different time. Yet, someone booking a vacation months ahead will accept all of it. The condition sorts passengers because the price can’t on its own.
So, there isn’t one set fare for all the tickets. The seat has no value to recover, no production cost of mark up, or shelf life after the plane takes off. Ultimately, what you paid for is when you paid it.
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