The truth about airfares and why they can be so expensive

You’ve just nabbed tickets to a big concert in Auckland. The other day you had a look at the Air New Zealand website, and flights were available for $69.

Now that the tickets are actually in your hot little hands, you’re ready to lock in your flights. You jump back on the airline’s website – and to your horror, the flights have shot up to $200.

What you paid for your seat will be totally different to the person sitting next to you.

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What you paid for your seat will be totally different to the person sitting next to you.

Outrageous, right? Clearly a case of price gouging – where a company raises prices to unreasonable levels. You figure they spotted your search the other day, realized you wanted a flight, and punished you for not booking it right away by hiking up the prices.

Well, it turns out it’s a little more complicated than that. To ensure you get the best possible deal, here’s what you need to know about how airlines set their prices.

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How airfares work

Flying planes is not cheap, and airlines obviously want to at least cover their costs. If everyone on a flight paid the lowest price – let’s say $69 – they wouldn’t make enough money.

On international flights, there are different classes – economy, premium economy, business, and sometimes even first. You know economy class is the cheapest, and first class is for rockstars and royals.

It turns out there are more classes than just economy, business and first – it's just that some are invisible.

SUPPLY

It turns out there are more classes than just economy, business and first – it’s just that some are invisible.

But there are also classes within each of these classes – even economy, and even on domestic flights. Except these ones are invisible. And these are why you probably paid a totally different price for your seat to the person next to you.

Under this approach, airlines take an empty plane and allocate all the seats into different “fare buckets”, with a certain number in each. Once all the seats in the cheapest bucket are sold out, seats in the next, slightly more expensive bucket become available. As the plane fills up, they move through these buckets, getting more and more expensive – until all that is left are seats in the highest, most eye-wateringly priced bucket that you’d have to be a rockstar or a royal to pay for .

Air New Zealand says this is the way they operate. Their website shows they have 15 different booking classes, or buckets, on domestic flights – each identified by a different letter of the alphabet, which you can actually see on your ticket.

“Our pricing is tiered and allocated to each seat on the plane,” Air New Zealand chief customer and sales officer Leanne Geraghty said.

“Generally, the first seats sold to early bookers are the cheapest, and as each seat sells, the fare level will slowly increase as the flight gets fuller.”

supply and demand

This approach means if there’s a period when everyone wants to travel – like the school holidays or Christmas – seats in those cheaper fare buckets are going to be snapped up early, and fast.

In these cases, your only hope is that the airline will respond to the demand by putting on more flights, giving you another shot at those cheap seats.

But this can be a tricky balance for airlines to get right. They want to respond to the opportunity to have more paying passengers, sure, but they also have to be confident they will get enough bums on seats to make it worth it.

Recently we’ve been seeing this challenge playing out with trans-Tasman flights. Even though our borders have reopened, there’s still nowhere near the number of planes flying across the ditch compared to pre-Covid – airlines are trying to work out what the level of demand is, to ensure their planes will be full.

Air New Zealand and Qantas have both put more flights on trans-Tasman routes in response to demand.

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Air New Zealand and Qantas have both put more flights on trans-Tasman routes in response to demand.

With so few flights available, most have been selling out – or the only seats remaining are the really expensive ones. Most trans-Tasman travelers aren’t used to these prices, said AirlineRatings.com editor-in-chief Geoffrey Thomas, who is based in Western Australia.

“Pre-Covid, airlines were flying around their aircraft at around 75% full, and therefore there were still quite a few cheaper seats available,” he said.

“Now they’re flying them around at 95% full, and there’s no cheap seats available because they’ve all been snapped up by travelers.”

We have seen Air New Zealand and Qantas starting to respond to that demand – Air New Zealand said it has added an extra 96 ​​flights through to June, while Qantas is set to ramp up its schedule later this month, increasing existing flights and adding more services .

But for international travel in general, Thomas said travelers could expect airfares to be “all over the place” over the next six months as airlines worked out exactly where travelers wanted to go, and how many flights to put on.

“If you see a fare you’re comfortable with and happy with, take it. Right now it’s impossible to know what the fare levels are going to be,” Thomas said.

“For next six months at least, booking as far ahead as you can, to get the best fare you can, is the best advice.”

To go incognito, or not go incognito?

You’ve probably been told at some point to always clear your cookies or use incognito mode when searching for flights, so the airlines can’t keep tabs on you and jack up the prices accordingly.

But is this actually a thing?

In some cases, pricing strategies do go beyond supply and demand. Online businesses have the ability to charge people different prices based on their personal data and online activity through cookies, using this information to figure out what someone might be prepared to pay.

This is something that airlines are said to have been investigating and adopting in recent years.

Air New Zealand insists it does not change the price based on previous searches of a flight, referring back to its tiered pricing system.

“Often when someone sees a fare rise, it’s because someone else booked the last of those seats at that price level, so the next higher price level is now available,” Geraghty said.

With so much secrecy around pricing, it can't hurt to try searching in incognito mode.

123rf

With so much secrecy around pricing, it can’t hurt to try searching in incognito mode.

But the thing is, Air New Zealand doesn’t have to tell us exactly what it’s doing, or indeed whether it’s using our information to come up with personalized prices.

Consumer chief executive Jon Duffy said unlike in Europe, our privacy legislation doesn’t cover the concept of “algorithmic transparency” – basically, that businesses must be able to explain how they are using our data to make decisions.

“You or the regulator has the right to go, ‘hey, you made a decision about me…I have a right to understand what that decision-making process is. You need to open up your workings and show me how you’re calculating price’,” Duffy said.

“We don’t have that here, and it changes the playing field for consumers. All the power is with the business… they can use whatever they know about you to determine your willingness to pay.”

But even if we did know for sure that this kind of dynamic pricing is occuring, there are no laws against it. And the consumer protection laws that we do have are out of date for dealing with it, Duffy said.

“The Fair Trading Act says you can’t make a misleading representation about price. But as the environment that we consume in changes and more pricing is personalised, what is ‘the price’?”

Duffy said browsing in incognito mode – for anything, not just airfares – could be a double-edged sword for consumers. On the one hand, it might protect you from any potential price-raising, but in some cases, you could also end up missing out on deals.

“It could be a website knows you’re a loyal customer who’s bought lots of stuff… and they offer you a better price, or some other reward for being a good customer.”

But if you’re suspicious as to whether or not you’re getting a fair deal on airfares, Duffy’s advice is to try both strategies.

“You can use is go in as yourself, normally, and see what prices you’re offered, and then clear your cookies or go in from someone else’s device and see what you get presented with,” he said.

“I would be put out if you and I both went to Air New Zealand’s website at the same time, looking for the same flight, and you got offered a cheaper or more expensive flight than I did, simply because of your purchasing history or however else you present to the company.

“I would find that weird, offputting, and a bit creepy, actually.”

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