Cracking the Code: The Secret Origins of Budget Airfares

Post originally Published December 22, 2023 || Last Updated December 23, 2023

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Cracking the Code: The Secret Origins of Budget Airfares

Cracking the Code: The Secret Origins of Budget Airfares - The Art of Yield Management

The art of yield management is crucial for airlines looking to fill seats without compromising profits. Airlines have honed strategies over decades to optimize fares and inventory based on predicted demand. While opaque to passengers, these scientific pricing practices allow budget carriers to consistently undercut major airlines.

Yield management utilizes historical data, booking trends, and statistical modeling to forecast demand and set fares accordingly. Airlines consider time until departure, market conditions, competitive pricing, and travelers' willingness to pay. Prices fluctuate based on algorithms calculating supply and demand.

As a flight fills up, remaining seats become more valuable, so fares increase. When booking lags, discounts are offered to stimulate purchases. But seats are never given away solely to fill a plane. There is always a method behind markdown madness.
Budget airlines mastered yield management out of necessity. With lean business models, each fare must pay its way.Spirit famously offers $9 base fares to get travelers in the game. Fees for bags, seats, snacks and such then compensate for rock-bottom sticker prices. Stimulating impulse buys drives ancillary revenue.
Regional carrier Allegiant has elevated yield management to an artform. The airline flies routes few others service, allowing it to command prices based on demand. With limited competition, Allegiant can charge what the market will bear.

What else is in this post?

  1. Cracking the Code: The Secret Origins of Budget Airfares - The Art of Yield Management
  2. Cracking the Code: The Secret Origins of Budget Airfares - Filling Empty Seats at Reduced Prices
  3. Cracking the Code: The Secret Origins of Budget Airfares - Partnering with Third Party Sites for Wider Reach
  4. Cracking the Code: The Secret Origins of Budget Airfares - Offering Basic Economy Fares with Restrictions
  5. Cracking the Code: The Secret Origins of Budget Airfares - Charging Extra for Preferred Seats and Baggage
  6. Cracking the Code: The Secret Origins of Budget Airfares - Using Ancillary Fees to Offset Discounts
  7. Cracking the Code: The Secret Origins of Budget Airfares - Regional Carriers Compete on Price
  8. Cracking the Code: The Secret Origins of Budget Airfares - When to Find the Best Budget Airfare Deals

Cracking the Code: The Secret Origins of Budget Airfares - Filling Empty Seats at Reduced Prices

Nothing strikes fear in the heart of an airline revenue manager like an empty seat. Once that aircraft door closes, any unfilled cabin space represents lost potential revenue. Airlines utilize a variety of tactics to prevent flying empty. Among the most common is discounting unsold seats as departure nears.
Known as "distressed inventory", these last-minute deals allow carriers to recapture a portion of revenue from seats that would otherwise fly vacant. Travelers willing to chance a spontaneous trip are rewarded with deeply discounted fares, sometimes up to 80% off normal prices.

It's a classic win-win - the airline generates income on perishable inventory while the traveler scores an almost unbelievable bargain. Timing is everything when it comes to distressed seats. Deals tend to appear 1-2 weeks pre-departure, then increase as the date nears. The best fares are typically offered 72 hours or less before takeoff.

Savvy travelers pay close attention to discount announcements and are ready to pounce when bargain basement prices are released. Signing up for airline email alerts is one way to stay on top of last minute deals. Social media is another avenue airlines use to push unsold seats.
Partner sites like Priceline and Expedia also advertise distressed fares for their airline clients. And metasearch engines like Skyscanner excel at uncovering and comparing late discount offerings across multiple carriers.
Of course along with amazing deals comes some risk. Flights booked at the last minute are usually non-refundable and non-changeable. Delays or cancellations can ruin even the best laid travel plans. Booking backups and travel insurance help reduce hassles from irregular operations.

Distressed fares work well for flexible travelers without firm schedules or set destinations. Retirees, remote workers, and perpetual nomads thrive on grabbing last-minute deals. The ability to travel on short notice opens access to some unbelievable airfare bargains.
While filling seats is the name of the game, airlines still utilize yield management principles when posting last minute discounts. Demand and competitive factors weigh on distressed pricing decisions. Busy routes may see smaller reductions than flights with lots of open inventory.

Cracking the Code: The Secret Origins of Budget Airfares - Partnering with Third Party Sites for Wider Reach

Budget carriers leverage partnerships with online travel agencies (OTAs) like Expedia and Priceline to extend their marketing reach. Listing fares on high-traffic sites expands visibility beyond airline-owned channels. The goal is putting cheap ticket inventory in front of as many potential travelers as possible.

According to Expedia, partnering provides a symbiotic relationship. OTA mass market exposure helps drive incremental bookings for airlines. In exchange, Expedia gains exclusive access to discount fares not available elsewhere. For budget airlines focused on low-cost distribution, this outsourced model makes perfect sense.
Spirit Airlines credits OTAs for playing a major role in their growth. The partnerships allow Spirit to list fares without significant marketing expense. OTA users searching across airlines often discover Spirit's cheap tickets, which they may have otherwise overlooked. Conversion rates are impressive - Spirit claims 1 in 3 bookings originates from OTAs.

Frontier also embraced third parties early on. Like Spirit, Frontier lacked brand awareness in its early days. OTAs provided a pipeline of customers as the airline expanded nationally. Today, Expedia and Priceline remain core Frontier sales channels. In some cases, Frontier offers OTA-exclusive discounts to incentivize bookings.

Partnerships allow OTAs to redirect searches when an airline has a better fare or schedule than what Expedia displays. This benefits travelers, who gain access to fares they may have missed. OTAs may also apply pressure on airlines when fares they index don't stay competitive.
However, OTAs do come at a cost. Most charge airlines commission fees ranging 15-25%. And budget carriers have complained about display bias on OTA sites favoring major airlines - despite cheaper fares. Lawsuits have been filed as a result.

There's also the issue of customer ownership. If a discount fare is found via OTA, the traveler's loyalty lies with them over the airline. Budget carriers prefer direct bookings, which provide full pricing control and allow collecting customer data.

Cracking the Code: The Secret Origins of Budget Airfares - Offering Basic Economy Fares with Restrictions

Budget carriers bank on basic economy fares to stimulate bookings while limiting frills that drive costs. These restrictive ticket types appeal to price-sensitive flyers focused solely on the bottom line. Restrictions offset the super cheap base fares carriers offer to get travelers in the game.
Spirit Airlines pioneered the basic economy model in the US. The carrier deduced most passengers just want the seat, with extras amounting to overkill. Eliminating everything from pre-assigned seats to carry-on bags allowed Spirit to trim expenses and lower fares.

Of course, that bare bones approach wasn’t for everyone. But for certain demographics like college students and backpackers, a cheap ticket trumps all. As long as you read the fine print, basic economy works. If not, gotcha fees multiply rapidly.
Recognizing Spirit was on to something, other budget airlines followed suit. Frontier, Allegiant, and regional carriers like Sun Country dabbled in no frills fares. Stripping out inclusions let them compete with Spirit on base ticket prices.
But the majors’ motivation differed slightly. With rising costs, basic economy allowed them to segment coach cabins into separate fare classes. This supported yield management tactics to optimize pricing. Traditional main cabin prices could be sustained while still competing with budget carrier bare fares.
For travelers, basic economy requires preparation and flexibility. Experts suggest packing light and printing boarding passes in advance to avoid carry-on challenges. Be ready for middle seats at the back of the plane. Paying to select a seat or upgrade bags can diminish savings.

Cracking the Code: The Secret Origins of Budget Airfares - Charging Extra for Preferred Seats and Baggage

Scoring a cheap base fare feels like winning the lottery – until you start adding on the extras. Preferred seats, early boarding, carry-on bags; the surcharges add up fast. Before you know it, that rock bottom ticket price has ballooned 50 percent. Budget airlines bank on these ancillary fees, using a la carte pricing to pad the bottom line.
Charging extra for perks allows carriers to advertise jaw-dropping low fares, while still generating ample revenue. Unbundling stimulates impulse purchases. Many flyers start with basic economy but upgrade bags or seats as the departure date nears. Fear of getting stuck in the dreaded middle seat often triggers buyers’ remorse.

According to IdeaWorks, ancillary revenue among airlines soared to $92.9 billion in 2017 – up from just $2.1 billion a decade earlier. Baggage fees alone contributed $28.5 billion. Budget carriers excelled at the add-on game. Spirit drew an impressive 48 percent of total revenue from passenger fees, the highest percentage globally.

Ultra-low-cost carriers (ULCCs) like Spirit and Allegiant employ dynamic pricing algorithms to optimize ancillary charges. As with airfares, seat and baggage fees fluctuate based on demand. Last minute upgrades will cost you. Savvy travelers avoid surprises by researching fees in advance.
Major airlines followed their budget peers in unbundling services. Checked bags, once free, now incur fees. In-flight dining went from basic to buy-on-board. Even pillows became pay-to-play. Critics claimed unbundling allowed majors to disguise airfare hikes while maintaining the illusion of low fares.

Yet as the big carriers shifted towards mimicking budget airline business practices, an odd role reversal occurred. To compete with bare bones basic economy fares, majors began offering “no-frills fares” minus some restrictions inherent with basic economy. Perks like seat selection and elite upgrades were restored to stimulate bookings.
Of course, these less restrictive economy fares came at a premium. In the end, all roads lead back to ancillary revenue. Whether you choose a true bare fare or slightly enhanced basic economy, extras inevitably increase the out-of-pocket cost. Budget conscious travelers still come out ahead sticking with ULCCs like Spirit and Frontier.

Cracking the Code: The Secret Origins of Budget Airfares - Using Ancillary Fees to Offset Discounts

Spirit Airlines didn’t stumble upon the genius strategy of offsetting airfare discounts with ancillary fees by accident. There was method behind the airline’s perceived madness when it began unbundling services that were traditionally included in the price of a plane ticket. Spirit understood that breaking out fees for bags, seat assignments, drinks and snacks allowed them to heavily discount base fares to levels unheard of at major carriers.

See, Spirit coveted being known for having the lowest fares, period. Problem was, they couldn’t just give away seats without destroying their razor thin profit margins. So executives got creative, shifting amenities that added cost into optional add-ons. This let Spirit advertise those enticingly low fares that grab travelers’ attention. Yet once customers start selecting seats, checking bags and buying drinks, the out-of-pocket cost gets boosted back up again.
Of course, ancillary fees go beyond merely offsetting discounts. Charging ala carte for services also incentivizes impulse purchases. Many a flyer has gotten to the airport only to fork over $40 for a carry-on bag to avoid checking their luggage. And who hasn’t panicked about getting stuck in a middle seat and paid double to secure an aisle? Vivid visions of travel misery loosen purse strings.
Additionally, reducing inclusions lowers carrier costs. A gate agent doesn’t have to be paid to check bags if flyers must do it themselves. Cutting back on free beverage service equates to big savings across tens of thousands of flights. Every marginal gain counts when running ultra lean.

Ancillary revenue has soared across commercial aviation, though ULCCs like Spirit and Frontier remain at the forefront. In 2021, Spirit generated a whopping $71 per passenger from fees, far exceeding major airlines like Delta and American. In total, non-ticket revenue accounted for nearly 50 percent of Spirit’s income.
Yet some criticize that ancillary pricing strategies amount to bait-and-switch. Luring customers in with crazy low fares only to nickel-and-dime them to death seems ethically questionable to many. But ULCCs counter that transparency is key - all fees are disclosed upfront if travelers read the fine print. Plus, passengers aren’t required to buy anything beyond the basic ticket.

Cracking the Code: The Secret Origins of Budget Airfares - Regional Carriers Compete on Price

Flying may feel like an oligopoly dominated by major airlines Delta, American and United. But regional carriers thrive by finding niches and competing aggressively on price. These smaller airlines laser-focus on driving down costs so they can undercut big airline fares and still turn a profit.
For example, Allegiant Air built a business model around linking smaller underserved cities to popular leisure destinations like Las Vegas, Orlando and Arizona. With limited competition on many routes, Allegiant can command premium pricing. The airline ratios number of flights to stimulate demand at optimum yields. Ancillary fees then provide gravy.
Allegiant schedules frequent flights to Florida from Midwestern and Northeastern cities during colder months when snowbirds migrate. Competing airlines can’t match Allegiant’s low fares and nonstop routes. Savvy travelers capitalize, avoiding costly connections at hubs.

Another regional carrier, Sun Country Airlines, dominates Minneapolis with affordable nonstops across the country. As Delta’s fortress hub, fares used to be sky-high. Sun Country changed that dynamic by focusing on core markets where Delta was vulnerable. Operational reliability and customer satisfaction now rival the majors.
Spirit Airlines attacked major airline hubs by offering absurdly cheap basic economy fares. The tactic stimulates impulse buys from bargain shoppers. Spirit has expanded mostly into larger markets, but still displays characteristics of a regional carrier.
JetBlue employs a hybrid approach, combining major airline scale with regional attributes. The carrier concentrates on key geographies like New York and Los Angeles where it can grab share. JetBlue’s terminal strategy avoids messy hubs, keeping costs in check.
Regional airlines recognize the most powerful weapon for combating giants is low fares. Efficient operations are mandatory. The business model centers on optimizing asset utilization and ancillary revenue while eliminating frills.
Savvy travelers learn the nuances of regional carriers serving their airports. Signing up for fare alerts tips them off to sales. Booking directly on airline sites ensures access to cheapest fares. And flexibility allows grabbing last-minute deals when majors seek to block discounters.
Partnering with OTAs like Expedia also helps regionals gain visibility. Searching across airlines facilitates discovery of options major airline sites obscure. Multi-carrier displays reveal if a regional has a better schedule or fare despite lack of brand awareness.

Cracking the Code: The Secret Origins of Budget Airfares - When to Find the Best Budget Airfare Deals

Uncovering airfare deals feels akin to striking gold - that exhilarating rush of hitting a jackpot you can scarcely believe is real. Of course with flight sales, timing is everything. Savvy travelers pay attention to patterns that reveal when bargain airfares are most likely to emerge. Understanding the science behind discount pricing empowers you to pinpoint the prime booking windows.
Most airlines utilize sophisticated yield management strategies to calibrate fares based on forecasted demand. When seats are scooped up quickly, prices rise. Slow booking periods trigger markdowns. This cycle repeats as departure nears, with each fare adjustment aiming to maximize revenue. Basically, airlines are perpetually tweaking prices to capture what the market will bear at any point in time.

Knowing this science, smart flyers target off-peak seasons, slower travel days and extended advance purchase. Avoiding peak demand provides leverage to grab deals before airlines ratchet up fares. Holidays, summer vacations and other high volume dates usually sustain pricier airfare - often 30% or more. Being flexible on your schedule opens opportunities.
Similarly, red-eye flights and mid-week departures are discounted more heavily than coveted weekend getaways. Think 6am Monday versus 6pm Friday. Requiring a Saturday stay-over used to score deals, but airlines now apply weekday pricing on many routes. Still, departing earlier in the week provides a head start on sales before weekend demand spikes prices.

Booking far in advance also tips the scale in your favor. Airlines discount further when trying to stimulate future bookings. A flight selling today for $49 may jump to $79 next week and $99 the following month. Sales often require purchase by a specific date, locking you into the lowest fare. Re-shopping later risks paying more.
Many airlines launch sales to celebrate new routes or additional capacity. Extra seats equate to more discounting power. But you have to act fast before inventory disappears. Signing up for fare alerts provides advance notice when your target market or route goes on sale.
Of course last minute deals exist too for the spontaneous among us. Airlines slash fares starting 2-3 weeks out on flights with availability. But waiting until the last minute is risky. Ideal seats sell out quickly, leaving middle options between chatty travelers. Carry-on space dwindles as everyone races to board first. Delay odds also increase as aircraft get rescheduled to consolidate loads.
Alternatively, try tracking prices over months to identify seasonal dips on your chosen route. Holiday surges subside into January and February. Summer high fares cool off in the fall. Leverage shoulder seasons to your advantage. Appreciating airfare cycles saves big bucks.

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