Cheaper today, pricier tomorrow and a total bargain the day after. Online prices for products are notorious for fluctuating by the hour or even minute.
These ever-changing e-commerce prices have their origins in bookings for air travel: In the 1980s, airlines in the US began to adjust prices based on data and using algorithms - the start of dynamic pricing.
Economics historian Dr. Guillaume Yon researches this very topic: How airline experts once developed pricing systems and are still improving them today.
In an interview, Yon explained to us why the airlines don't like to talk about the systems and why even their own analysts are sometimes unable to predict how ticket prices will develop for a particular flight.
However, Yon does have some advice for anyone looking for cheaper flights.
You have analysed booking systems of airlines. Can you explain to a layperson how they work and how the often fluctuating prices come about?
Economics historian Dr. Guillaume Yon: People might not know this, but airlines are not very profitable companies. Their margins are pretty low. That is why, their booking systems are extremely important for them and therefore they do not communicate a lot about those systems – it's pretty secret. Because the way, the system is set, could make a difference between profitability and bankruptcy.
When you talk about the systems, you must know: Airlines must commit to a specific aircraft flying a specific route mostly a year in advance. So the number of seats available is kind of set very far in advance. But there is uncertainty about how many people will book this flight during that year.
So with their systems, airlines are trying to achieve two main goals: First, fill the plane. Second, make as much money as possible with it.
What airlines try to do, to put it very simply: They try to sort out people who are not willing to pay a lot of money for tickets, and get a certain number of seats for them. At the same time, they target the people who are willing to pay much more and try to make them pay much more. So, it is about efficiency in filling the capacity and making the most possible profit.
Some flight-portals say, based on their analyses, that certain weekdays are better for booking. Others simply say: Booking early is the cheapest. You say, considering your knowledge: It is almost impossible to know an optimal booking strategy. Why?
Yon: I would agree with the fact, that the earlier you book, the cheaper it is. That is a pretty good rule. Because usually, over the booking period the price will increase with the departure coming closer. For most airlines, this is based on a crucial difference between tourists who book early and are pretty price-sensitive, and business travellers, who book later and are less price sensitive.
However, systems are getting more and more reactive. If they recognize during the booking window that the expected demand is not materializing, prices could drop. That's why price alarms can be a useful tool for flexible travellers. If it happens, they can take that advantage of it.
Anyway, the reason why it's mostly impossible to find an optimal strategy for saving the most money: In order to know when to book you would have to know how full the flight is expected to be.
The crazy thing about these computerized systems is: They are very complicated. Even analysts within the airlines can't say if the prices will rise or fall in days or weeks. Because it requires knowledge of all the different flows of passengers and all the different forecasts about these flows.
Compared to airlines like Lufthansa or Finnair, low cost airlines like Ryanair or EasyJet often have a simpler system: The prices are increasing, the closer the flight is, but it's not that massive.
What they make money on is what is called in the industry: ancillaries. Seat selection, luggage, priority-boarding. All these small things, they make you pay for in addition to the tickets. What we know is, that low cost airlines make roughly 60% of their profit by selling such ancillaries.
Which is crazy: They make more money on selling additional things than on selling the ticket. And that changes the aim of the booking system: They want to use the pricing to fill the plane with as many persons as possible, in order to sell to them such additional things.
So, with all your knowledge - how do you go about booking flights?
Yon: I am interested in this for academic reasons because it is important to know how these systems work. Airlines use them for a long period already and they have inspired a lot of the dynamic pricing systems that we see everywhere in the internet today.
But the thing is: You can't beat the system. So I don’t use my knowledge so much. I just know for sure that it is better to book early. That is definitely the best thing to do if you want cheap prices.
Beyond that: The calculation that the systems perform, especially the forecasting of different kind of passenger flows, and how they optimize all that across the complex networks, makes it impossible to have a booking strategy as a customer.
So yes, I do what probably everyone does: I look at flight search-engines like Google Flights and try to book as early as possible.
About Dr. Guillaume YonDr. Guillaume Yon is a historian of economics. His current project is a history of airline pricing. Yon interviews the developers of such systems, who do not talk precisely about how they work today, but do to explain how they worked in the past. He also gets insights from science papers about those systems.
"It's very technological and complex, so airlines need to share their insights within the scientific community to optimize their systems," he says. Yon is a junior fellow at the Käte Hamburger Kolleg at Germany's RWTH Aachen University.
