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This Month's Tip(s): Airfares Constantly Changing.
First I would like to wish everyone a happy and prosperous new year.
January is typically one of my busiest months and a time where pricing not only changes daily but I have seen prices change right before my eyes. What is happening behind the scenes is what is called inventory management. It is the classic economic law of supply and demand. The airlines are masters at it, though is frustrates consumers to no end. Hotels are getting more sophisticated at it along with car rental companies and even cruise lines are playing the game.
So what is inventory management and why does it affect the price? Let’s focus on the airlines since this is where a consumer will see it most but conceptually it is the same for all travel vendors. Inventory management is how airlines manage how much they want to sell each seat on the aircraft to maximize profits. You would think it would be simple. They know how much it costs to fly from point A to B, so price the seat to cover the cost and markup up to the margin of profit they want. Oh if it were so easy. It is not so much the price that changes but more of the airlines have many different prices for the same flight. So the question is how many seats do they want to sell at each price?
Competition and advance booking patterns factor into airline seat costs too. The more competition, the more the airlines have to offer a higher percentage of seats at a lower fare. In our market in Denver, Southwest has changed the equation since they started flying here. Now United and Frontier have to be more competitive in the Southwest Airlines markets. Does this mean that they will price every seat at the low fare? No, they have formulas that check constantly what the competition is doing, how much of the plane is booked in advance and other factors that change those fares thousands of times a day. If Southwest is not selling any more seats at the bargain basement prices, United and Frontier might decide to sell a few more to attract more customers on that flight or they might say, lets stop selling the lower fares since no one else is. This is why cities with little competition have higher airfares on average. The airlines have to make it up somewhere if they are selling under cost in competitive markets.
The airlines also make a ton of money on international business class and first class seats. As leisure travelers we should all be thanking the business traveler for paying those outrages prices which help keep the fares lower for us common folk.
Hotels, car rental companies and cruise lines are not quite as bad when prices changing daily but you can be pretty sure if they are selling out and getting closer to your travel date, the price will rise.
I took out my crystal ball and dusted it off again. I do this every January and it still is as cloudy as ever but through all the clouds I do predict airline fares on average will go up. There are two major factors in 2008 that will drive up prices. Airlines cutting back flights and fuel prices. Remember the law of supply and demand? Less inventory, same or high demand, higher price! And every time we drive by the gas station and cringe, well the airlines feel the same pain only theirs is in the millions for every penny that jet fuel increases.
Let’s be thankful our local grocery store does not change prices as much as the airlines. Can you imagine every time you walk down the soup aisle, your favorite can of chicken noodle soup goes up or down? I can see it now, people telling others, if you go down the soup aisle on a Thursday night after 8pm, you have the best chance of getting your soup at a lower price. And why can’t I find that free can of soup using my frequent grocery points?
Wishing you and your family safe journeys.
David Rojahn, CTC
DTR Travel Inc.
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