The only function of economic forecasting is to make astrology seem respectable.¨
John Kenneth Gailbraith
Yield Management 101
The travel industry determines prices through a system called yield management.
Yield management is pervasive throughout the travel industry. However, Fifty-Plus Nomads will encounter it most likely when buying an airline ticket.
While seemingly otherwise, travel providers put a lot of time of effort into determining their pricing.
The travel industry functions as a computerized version of an old fashion bazaar. The vendor determines the price based on what he or she believes the customer is willing to pay.
The travel industry wants those customers who can afford to pay high fares or who are desperate for their services to pay through the nose. At the same time, they need to charge less money to attract customers for their highly perishable product.
As a result, unlike most things that you purchase, the same hotel room, car rental, or airfare will be sold for several different prices. The price depends on many factors, including:
- When you want to use the product;
- When you make your booking; and
- Increasingly, what kind of perks you want.
What Does This Mean for Consumers?
Some of these variables are easy for the consumer to anticipate and do not change a lot. For instance, the lowest airfares require you to buy the service in advance (this is truer with airlines than hotels).
Why? Airlines know that travelers who have little flexibility when they need to travel will pay more than those with more options. Typically, businesspeople have little flexibility. They need to be at a meeting at a particular time or place. Thus, they will pay more than someone who can wait to fly until the price is more reasonable (usually leisure travelers).
Airfares and hotel rooms will be at their highest cost around holidays and when the weather is at its best at your destination. You can expect the highest prices in the US, for example:
- Around the Fourth of July Holiday, Thanksgiving, Christmas, Spring Vacation/Easter.
- Throughout most of the summer, because schools are out of session, and the weather tends to be better. (Note: Airfares and hotels will be high in the summer even where the weather is scorching, like in Southern Florida because kids are out of school).
All travel providers use computer algorithms to compare how full they are compared with the past. If they have sold more seats (or rented more rooms or cars) than on the same day or flight, than in the past, they will reduce the number of low-cost options. If they have more space available than expected, they will offer cheaper alternatives.
Airlines Versus Hotels, Cruises, and Car Rentals
There are some important differences between booking airlines and the rest of the travel business that affect consumers.
Hotels, Cruises, and Car Rentals
Hotels are often cheapest a month or so before you plan to travel, and there are sometimes good deals to be found for last minute hotels. Also, the prices don’t change that dramatically depending on when a book a hotel.
Unless there is a cancellation fee, you should check prices frequently even after you make your reservation. If the price drops, cancel your reservation and make a new one at the reduced price. (You should do the same with cruise ships. Only, instead of cancelling the reservation, call the cruise line and ask for a rebate or upgraded cabin).
Cancellations frequently occur with hotels and car rentals. Therefore, you sometimes can get a good deal just showing up at a hotel or renting a car at the last moment.
Airlines, in contrast, usually do not have many low-cost, last-minute options. (They are hoping that business people will buy seats at the last minute for beaucoup bucks).
Airlines also do not have a lot of cancellations. (I have often found that I paid less for a one-way flight than the cancellation fee. When that happens, I do not show up for the flight. There is no incentive to cancel the flight),
Low-Cost Airline Tickets
During the 335 days that a flight is open for sale, there are likely to be some periods when airlines offer a special fare. Sometimes, these special fares are available for just 24 or 72 hours. Airlines will only promote these sales if they have a hard time selling the tickets.
These sales explain why prices can be high when a flight opens for sale 11 months in advance. It is impossible to determine when these sales will occur. However, most experts maintain that the best time to buy a flight is often between one and four months out.
Of course, there is always a slight risk that if a flight is more popular than expected, the prices will go up. (This is why it is usually advisable to book travel during the high season more in advance than during the low season).