Have you ever wondered why last minute flights are generally so expensive? After all, very rarely planes are completely full and more often than not there are some, and sometimes many, empty seats left.
You would expect airlines to sell those seats for less just moments before departure since an empty seat makes zero money and, as we know, half a loaf is better than none.
However, that’s not what generally happens. In this blog post I will examine some of the reasons why last minute flights are not as cheap as they (probably) should.
What we exactly intend with last minute flight?
First and foremost, what is the exact definition of last minute? Well, it seems there is nothing set in stone and everybody has a different perception of which time frame is considered as last minute.
If you check in the online dictionaries, in case you don’t have anything better to do (in which case I would personally start to worry), you’ll find out that one of the most frequent definition is something along these lines: the latest possible time before an event.
However, generally speaking these days, especially when referring to holidays and, more in particular, flights, people tend to associate it to a time frame somewhere in the order of days or, even more, weeks. Really? Well, that’s quite a stretch from the minute as suggested in the words last minute, isn’t it?
To me, a minute is a minute, indeed. And, especially in the fast pace world as the one we live today, the word last minute would be probably more appropriate to indicate a shorter time span: minutes, for the more fastidious ones, or hours at most. Thus, I would expect a last minute flight to depart in hours or even days. But definitely not weeks.
How does air fare pricing work?
Now we get a bit technical, so feel free to skip the next two sections unless you are not a hardcore aviation enthusiast! Ok, here we go. Prices are generally lower in advance (i.e. few weeks or months before departure) and tend to increase over time until departure, when they usually tend to be the highest.
With airlines, and similarly with trains, the price change happens through the use of different fare classes, also called booking classes. These fare classes need not to be confused with the cabin classes (i.e. Economy, Premium Economy, Business, First) that most people are familiar with. So, within the same cabin class, for example the Economy class, there are many fare classes.
Each fare class, which is typically indicated by a letter (i.e. Y, W, N, etc) is associated with all sorts of different rules and, of course, prices. Apart from some exceptions, generally speaking, when a flight is published for sale (generally few months before the scheduled departure) all fare classes are open.
So, if you don’t have particular requirements and you book in advance, you can book a seat in Economy with a lower priced fare class. Booking this seat will be cheaper. However, as time goes by, generally the lower priced fare classes, which are also the most restrictive in terms of conditions, get progressively closed leaving open only the more expensive, although less restrictive, ones.
Therefore, although it’s not a rigid rule, it’s likely that closer to departure the very same seat in Economy class will be associated with a higher priced fare class and, therefore, more expensive. That’s why a last minute flight will be more expensive than the same flight bought in advance.
This pattern of increasing price seems to make sense since price rises according to the decreasing availability. In addition, airlines want to encourage people to buy early in order to secure the money as early as possible.
What seems to make less sense is why in the last hours before departure a seat which is still empty, and most likely will remain empty, is still very expensive.
Understanding the airlines’ behind the scenes logic of pricing is not an easy feat. This is exactly the remit of the Revenue Management department within both the aviation and the hospitality industry. Put simply, Revenue Management is in charge of optimizing, through the use of analytics, product availability and price in order to maximize revenue and, therefore, profit which of course is the holy grail of any business, including airlines.
Aircraft capacity: the Passenger Load Factor (PLF) and the variables affecting it.
One key variable of revenue management is the aircraft occupancy rate which is referred to as Passenger Load Factor (PLF) or, more simply, Load factor. This is an indicator of how planes are occupied or, in other words, a measure of how much of an airline’s passenger carrying capacity has been utilized.
PLF is a key metric of operational efficiency and therefore most commonly used to describe airline performance in commercial aviation. In short, for a given flight, the PLF is the number of occupied seats divided by the number of available seats.
A high PLF means that there are a few empty seats on the aircraft. For example, a PLF of let’s say 90% (which means that only 10% of seats are empty) is considered high. This is of course a good thing and this flight will most likely be profitable.
On the other hand, a PLF of 60% (which means that 40% of seats are empty) is quite low. This is not obviously a very good thing and in that case this flight most likely will struggle to be profitable.
But that’s not all. Capacity utilization, that is the PLF, is not the only variable affecting profitability. This also depends on how much each single seat is sold for. For example, even if a plane is half empty (i.e. PLF of 50%) but each seat is sold for a fortune, then that flight is probably profitable.
Conversely, even if the plane is full (i.e. PLF of 100%) but each seat is sold for peanuts then that flight, although full, will most likely result in a loss.
In the last decade there has been a fairly steady increase in PLF as air travel demand has increased. To get a rough idea, the worldwide average load factor in 2018 was 81.9%, the highest so far.
A better capacity efficiency means less air pollution which is definitely good news. It’s similar to more people taking public transportation instead of each single person taking his own car.
A number of variables affect the PLF including period of the year, day of the week, market, route, carrier, etc. For example, whereas a flight is very likely to be full (i.e. high PLF) during high season such as Christmas time, that same flight is likely to be less full (i.e. lower PLF) during low season, such as in November.
Generally speaking, these days low-cost carriers (LCC) such as Ryanair, tend to have a higher PLF compared to the traditional full service airlines such as British Airways, which have generally a lower PLF. For example, in 2017 Ryanair hit a whooping PLF of 96%.
This is also due to the fact that intracontinental and domestic routes (or short haul flights), which are the bread and butter of Ryanair and other low-cost carriers, tend to have a higher PLF compared to the intercontinental routes (i.e. long-haul flights) which are mostly operated by the traditional full service airlines.
Last minute flights VS other last minute products.
An aircraft, especially if we exclude some low-cost carriers and some peak days (i.e. 23rd of December) is seldom completely full. Yet, even if there are still empty seats, price is generally very high just before departure. In other words, last minute flights are generally expensive. Why is this?
As said, it does not seem to make much sense or, at least, it does not make sense in other markets. For example, if you go to the fresh food market it is very likely that the sellers will drop the price of their fresh goods when the closure time is approaching. That’s because the food which has not been sold yet, cannot be sold the next day as it will be no good. That’s what is often called the ‘everything must go’ sale.
Too good to go, a recent and smart British food startup, is trying to solve exactly this problem whereby connecting restaurants and fresh food shops with users who can buy the left over sometimes for less than half price close to business closure (sometimes even at midnight!).
By the way, supermarkets do the exactly the same thing when they reduce the price of fresh products on the day of expire. Similarly, we are all well used to sales seasons when clothes and the like are reduced sometimes of more than 50%. After all, who is enticed to buy that summer light cotton jumper when the first cold breeze starts to blow?
Isn’t this, after all, what we all refer to as common sense? But it seems that sometimes, as my old wise nanny used to say, common sense is not really so common! So, why this common sense principle, which is as old as the hills, does not apply to flight seats as well? Why don’t last minute flights also become cheaper?
Actually, the sale principle should apply even more with flight tickets. In fact, even if you probably can still use the salmon that you could not sell at your market stall before its expiry date (for example you could give it to your kittens who will not be too fussy and actually will much appreciate it even if a little bit off), or if you could keep that unsold cotton jumper (which you could try to sell it next year or use yourself) what could potentially be the use of a flight seat once the plane has taken off? Answer: zilch!
In other words, most products, including fresh food and clothes, still keep some value even after the expire date or the end of season. But a plane seat (and the same goes for trains and similar) has zero value once it has gone. A flight seat is what in jargon is referred to as a perishable product, which means exactly that.
Trying to understand the logic behind air fare pricing and why last minute flights are not cheap.
Why is it then that sometimes the price of an empty seat is still ridiculously high even few hours before departure when the chances of people buying it are almost zero? In short, why last minute flights are generally expensive? It’s not easy to give a one-size-fits-all answer to that question.
First of all, the mere fact that something is happening a certain way does not necessarily mean that there is a strong rationale behind. Sometimes the rationale might be flawed, or actually even absent.
The fact that apparently some airlines prefer to fly quite empty instead of filling the plane (what? Really?), that’s what some people in the airline industry say, seems not to go too far from this potential explanation. It’s seems a bit paradoxical if not bluntly illogical. It’s like a restaurant owner who prefers to have half of the tables empty! In fact, to disprove this myth, Ryanair is one of the most profitable airlines out there. And, guess what, their planes are generally full.
Second, these days Revenue Management people rely on software to calculate, through complex analytics, how much each seat should be sold for. Machine logic is deemed more reliable than the human one. Nevertheless, although machines have arguably a lower chance of error, they definitely do not possess that common sense that we were talking about. And this sometimes can come at some cost.
There is not a universal pricing logic across airlines as this varies depending on each one. However, at the risk of oversimplifying the algorithm mechanics, if the load factor is still low, and thus the revenue, then the software might decide to sell each seat for a higher price in order to compensate the meagre yield obtained so far and still trying to reach the financial targets, regardless of the actual chances of selling those empty seats.
Third, and probably mostly, airlines generally assume that the only people buying last minute flights are people who need to fly and therefore are willing to pay a premium price. The fact that they are willing to pay a higher price is probably true. But the fact that they are the only people buying a flight last minute, not so. What about all those flexible travelers who do not need to go to a specific destination on a specific date, but simply want to take a trip and aren’t too fixed on when or where?
Flexible travelers: are those a potentially untapped market share?
There are many flexible people who would probably buy a last minute flight if the price would be reduced. These people would probably go anywhere just to take a break from their routine and get out from where they live. Also, they probably don’t even know where they would like to go and actually need some inspiration.
This category of flexible travelers might include young people in general and, in particular, students; those out of job or who do not have a typical 9 to 5 job; those employees, increasingly more and more, who are allowed to work remotely; freelancers and internet entrepreneurs, also rising in number, who can work from everywhere just with a laptop and an internet connection; obviously the backpackers; and many others. For most of these individuals it won’t be too remote the idea of taking a last minute flight with short notice, literary within hours.
All these flexible people seem to be neglected, even though they are most likely more numerous than the occasional business traveler who has an urgent meeting to attend or the unfortunate one who needs to attend the funeral of his dear abroad.
Also, with particular regard to last minute business travel, first of all most destinations are probably more leisure than business. After all, how many business meetings are really happening in Rio de Janeiro or in Las Vegas?
Furthermore, most business trips are generally scheduled few days or even weeks in advance and seldom within the next few hours. And honestly, the super busy businessman who is prepared to pay any price for a last minute flight because he needs to attend desperately a meeting the day after to sign a multi-million dollar deal seems more mythological than anything.
Therefore, it seems that airlines have optimized their pricing for a minority of people (i.e. those who need to fly somewhere urgently) to the detriment of a much larger potential customer base which is left untapped (i.e. those flexible travelers who could fly anywhere at any moment). And doing so, they might miss out.
In fact, if you probably would not buy the salmon which is not the freshest anymore unless the price is so damn good (in which case you might close your nostrils for once) why would you think to take a last minute flight to somewhere you don’t really need to go, unless the price is ridiculously cheap?
To wrap up, even though the reasons why last minute flights are generally not cheap are still a bit hazy, hopefully some of the previous points will help to shed some light on it. I bet if airlines would use more common sense and tap into the market of flexible travelers which is currently untapped (those flexible travelers who would be willing to fly anywhere), they could most likely sell more and increase their profitability.
In turn, through a price driven demand mechanism, flexible people will be able to take more flights, even with few hours notice, providing they can get a real last minute flight deal. In short, that would be a win-win combination and everyone would be happier, airlines with more money, travelers with more travel experiences.
Let’s see whether in the future the logic within airlines will adapt to the changing landscape of an increasingly more flexible and internet connected generation.