The secrets behind crazy air-travel prices

By Karen Aho

Perhaps you've been here: You snag a flight cross country -- and back -- for just $320, board the plane and notice a bunch of empty seats. You think: How can an airline afford this?

A few months later, you repeat the trip on shorter notice. This time, you pay $1,200 for basically the same seat. You think: This airline is making a fortune off me.

But here's the thing: Airlines are not crazy. They know exactly what they're doing. They just don't always tell customers.

And to some extent they can't. The fares are so complicated, and change so often, that no travel agent -- no computer, even -- can tell you just what that ticket to Toledo will cost you next Tuesday.

"The yield-management system at the airlines has gotten so sophisticated," said Victoria Wofford, the president of the business-travel firm Tri-Pen Management. "Travelers certainly don't understand it, and the airline doesn't want them to."

Lesson No. 1: Flying isn't cheap

The U.S. airline industry historically loses more than it makes -- $35 billion in five years after 2000 alone -- and is the butt of many a poor-investment joke. (The best may be from Virgin Atlantic Airways founder Richard Branson, who said that to become a millionaire, one must get a billion dollars and start an airline.)

The problem lies in the convergence of two financial factors:

• Operating an airline is very expensive.

• Its source of revenue, the airline seat, is highly perishable. The moment the plane takes off, that revenue opportunity is lost forever. It is often compared to a rotting banana.

"It's one of the toughest businesses I can think of to make money in," said Daniel Petree, the dean of Embry-Riddle Aeronautical University's College of Business in Daytona Beach, Fla. "The landscape is littered with failures."

No airline in the world has succeeded with a single-fare structure, said Peter Belobaba, a pricing management expert at the Massachusetts Institute of Technology's Global Airline Industry Program. They get beaten by the competition during off-peak travel.

"They learn pretty quickly that that's not a revenue-maximizing, or profit-maximizing, way to go," Belobaba said.

Take this hypothetical from American Airlines, the world's largest airline and the only U.S. legacy carrier that hasn't filed for bankruptcy.

It costs American Airlines about 12 cents per available seat mile (that seat's portion of all the airline's costs) to fly a 757. With 188 seats, a 2,500-mile transcontinental flight on an American 757 must contribute $56,400 to the company's coffers (188 multiplied by 0.12, then multiplied by 2,500). To do that, every seat must sell for $300 ($56,400 divided by 188), said Scott Nason, American's vice president of revenue management.

Continued: The sub-$300 ticket

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