Airfare prices continue to fluctuate significantly. According to the U.S. Bureau of Transportation Statistics, the average U.S. domestic airfare reached $428 in the first quarter of 2026, up 4.7% from the previous quarter and the highest unadjusted first-quarter fare on record. How are airline tickets priced?
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We are all now familiar with changing flight ticket prices and price increases. Airlines adjust fares in response to changes in demand, capacity, competition and other commercial factors. However, consistently high price increases and extreme price ranges can harm a brand’s reputation and customer satisfaction if they are not managed strategically, potentially resulting in lower sales.
Price increases can improve revenue and profitability, but they can also affect demand and customer behaviour. If customers are unable or unwilling to adapt to higher fares, lower sales volumes can offset some of the benefits of a price increase. Frequent or poorly communicated price changes can also make purchasing decisions more difficult, particularly when customers have multiple fare options to compare.
In this article, we explore how airline tickets are priced, including the factors that influence fare changes and the role of dynamic pricing, revenue management and pricing technology.
We also examine how pricing decisions can affect sales, customer behaviour and the overall customer experience.
We argue that ticket price increases should be implemented alongside a well-thought-through programme of targeted discounts, promotions and marketing. This can help airlines balance higher fares with offers that provide value to customers and encourage demand where appropriate.
At Taylor Wells, we believe strategic discounting can help airlines manage the impact of higher fares while supporting sales, customer satisfaction and loyalty. Targeted discounts and promotions can provide additional value to customers while helping airlines manage demand and capacity.
Table of Contents:
I. How Are Airline Tickets Priced: Extreme Price Changes Explained
II. How Are Airline Tickets Priced: A Look Into Cathay Pacific’s Pricing
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How Are Airline Tickets Priced: Extreme Price Changes Explained
Where are the biggest price increases found?
- Less popular, remote or long-distance routes and destinations
- Last-minute bookings
- Peak travel periods – e.g. Christmas and other major holidays
- Bookings made closer to departure, when demand and remaining capacity can influence fares
Where are cheaper deals found?
- Less popular travel times and dates. Demand can be lower outside peak holiday periods, although fare patterns vary by airline, route and market.
- Targeted promotions for selected destinations, routes or travel periods where airlines have additional capacity or want to stimulate demand.
- Earlier bookings – airlines may offer lower fares further in advance, although pricing varies by route, demand, inventory and booking conditions.
- Avoiding last-minute bookings
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How do airlines calculate their price increases?
The airline industry has evolved significantly, particularly as digital booking channels and pricing technology have become more widespread. Airlines increasingly use pricing systems and algorithms to analyse factors such as demand, capacity, competition and booking patterns.
How are airline flight tickets priced?
Today, airline tickets are frequently purchased through digital booking channels, while pricing systems can use factors such as demand, capacity, competition, route conditions and timing to determine or adjust fares.
How Are Airline Tickets Priced? The Key Factors
Airline tickets are priced by balancing demand, capacity, competition, route conditions and timing. In this article, the key factors are:
- Demand and customer behaviour: Prices tend to rise during holidays, seasonal travel and other periods when many customers compete for limited seats.
- Competition: Airlines serving the same route may use lower fares, discounts or bundled inclusions to fill seats and compete for customers.
- Route and destination: Popular routes can command higher prices, while niche or remote destinations can also be expensive when flight frequency is limited.
- Seat availability and timing: Prices can change according to the number of seats available, the type of seat, the time of the flight and how close the booking is to departure.
- Capacity: Airlines may increase prices when available capacity is limited or lower them when they need to stimulate demand and sell more inventory.
- Pricing systems: Airlines increasingly use algorithms and AI-powered systems to review price and volume data, competitive movements and business constraints and update fares.
The challenge is not simply raising or lowering fares. Airlines need to balance revenue and capacity decisions with customer response, which is why targeted discounts and promotions also matter.
Discussion On How Airline Flight Tickets Are Priced
Why are prices more expensive for some deals? Why are there cheaper options for others?
As airfares remain elevated in some markets, customers are wondering why prices vary so significantly. Some are even complaining. On the other hand, there are instances when customers claim to get great deals. What’s behind these discrepancies?
Airlines use dynamic pricing and revenue management strategies to respond to changing demand, capacity, competition and booking conditions. Here are the factors affecting ticket prices:
1. Customer demand
For instance, flight prices can increase during holidays and peak travel periods when more customers compete for a limited number of seats.
2. Competition among airlines
When multiple airlines serve the same route, they compete for customers and may use different fares, discounts and inclusions to attract demand.
3. Route
If demand for a destination increases, flight prices may rise as airlines respond to changing demand and available capacity. Flights can also be more expensive when a destination is niche or remote and has limited flight frequency.
Moreover, an airline may adjust fares based on the type of seat, the number of seats available and the timing of the flight.
Another factor influencing fare differences is the increasing use of digital booking channels and automated pricing systems. Rather than relying solely on manual decisions, airlines can use algorithms and revenue management software to calculate and adjust fares based on demand, capacity, booking patterns and other commercial factors. How can airlines strike the right balance between price increases and discounts?
How To Have The Right Airline Flight Ticket Pricing Model And Algorithms
Flight ticket price increases should be implemented alongside a well-thought-through programme of targeted discounts, promotions and marketing. This can help customers feel that airlines are providing value alongside higher fares, rather than simply increasing prices without offering any additional incentives.
Strategic discounting can help airlines manage the impact of higher fares while supporting demand, customer satisfaction and loyalty. Targeted promotions can also help airlines stimulate demand on selected routes or during periods when additional capacity needs to be filled.
TIPS On How To Balance An Aggressive Price Rise Strategy With Strategic Discounting
How Are Airline Flight Tickets Priced Tip #1:
A hardline price increase strategy may negatively affect customer loyalty, brand perception and the overall customer experience. For instance, customers may become more likely to shop around for lower fares. Over time, airlines risk weakening their brand positioning while prioritising volume at the expense of customer loyalty and experience. Airlines should therefore implement price increases alongside initiatives that provide customers with appropriate value or incentives.
How Are Airline Flight Tickets Priced Tip #2:
Airlines can use targeted discounting to manage the impact of price increases and encourage specific customer behaviours. For instance, airlines can use targeted promotions for lower-demand destinations, travel periods or specific customer segments.
- Deep discounts may attract customers and generate short-term demand, but excessive discounting can put pressure on profitability and weaken customers’ perception of value.
- Targeted discounting and promotions can be more effective when they are aligned with customer needs and commercial objectives. It also shows the airlines know their customer better when they discount according to needs rather than pushing volume.
How Are Airline Flight Tickets Priced Tip #3:
Airlines may use pricing software and algorithms to automate and accelerate pricing decisions. These systems can improve efficiency, but they also introduce new challenges. For example, automated pricing systems may not fully capture customer willingness to pay or broader commercial considerations, potentially affecting profitability. There may also be situations where algorithmic pricing produces significant fare differences that appear inconsistent with customer expectations or market conditions. Although these outcomes may be logical within the model, they can still diverge from market conditions or customer expectations.
We believe that building pricing and commercial capability in the area of value-based pricing and consumer psychology is necessary for the airline industry for long-term profitable growth. Our findings show that when a business builds and embeds commercial capability across the organisation, bolstering its internal pricing skills and capabilities, it can generate at least 3–10 per cent additional margin each year while protecting revenue and volume.
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Implications Of Strategic Airline Flight Ticket Pricing Model Changes
For airline companies to achieve long-term profitable growth, they need to make strategic pricing decisions and build commercial capability. One of the best ways to do this is to establish a pricing team within the organisation. Establishing an internal pricing function can help organisations strengthen pricing governance and build long-term pricing capability. You can also prepare for an unexpected crisis, ensure your business thrives, and even expand if feasible.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. They can then identify more complex and previously unrealised opportunities, efficiencies, and risks.
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Conclusion
In this article, we discussed how airline tickets are priced. Customer loyalty, brand perception and the overall customer experience may suffer as a result of a hardline price increase strategy. Price increases must be implemented alongside customer-rewarding initiatives. Airlines can also use tactical discount mechanisms to mitigate the impact of price increases and to reward specific behaviours. Airlines can use pricing software and algorithms, provided they understand their limitations and maintain appropriate oversight. Most importantly, airlines must strive to have a good balance between driving profitability through extreme price increases and providing targeted concessions to reward spending during tough times.
How Are Airline Tickets Priced: A Look Into Cathay Pacific’s Pricing
On January 2, 2019, Cathay Pacific posted a well-crafted marketing tweet owning up to a huge pricing error they made with their airline flight ticket prices. The airline gave away a 95% reduction off their first-class and business-class airline flight ticket prices from Vietnam to North America (The pricing mistake went viral on blogging websites around the world, and that’s how Cathay Pacific found out about it):
“Happy 2019 all, and to those who bought our good – VERY good surprise ‘special’ on New Year’s Day, yes – we made a mistake, but we look forward to welcoming you on board with your ticket issued. Hope this will make your 2019 ‘special’ too!”
– (Cathay Pacific, 2nd Jan 2019)
When people saw this post in their feed, they questioned whether or not this was just a great marketing stunt to attract wide-scale public and media attention to Cathay Pacific’s first-class and business-class fares. The incident raised questions about how automated pricing systems can produce significant pricing errors and who should be accountable when they do. Today we’ll be discussing Cathay Pacific’s pricing strategies and how these mistakes keep happening.
How Are Airline Tickets Priced: Cathay Pacific’s Airline Ticket Pricing Strategy
In this article, we’ll be answering frequently asked questions about airline flight ticket prices. This will give you a comprehensive overview of several fundamental pricing principles, AI pricing and airline dynamic pricing strategy. We’ll be covering questions such as:
- When do airline ticket prices drop?
- Why do airline tickets change daily?
- What airline ticket pricing strategy do airlines use?
- What Price optimisation techniques do airlines use to optimise airline flight ticket prices?
- Who should be accountable for pricing errors and mistakes?
We’ll close by discussing several mind-blogging questions raised by the Cathay Pacific pricing error. Such as:
- Are we crossing some threshold beyond which using AI-powered pricing now requires a leap of faith?
- Will AI-powered pricing systems learn to intuitively think and make decisions that we as humans can no longer explain or correct?
- How can teams expect to work collaboratively with AI pricing when it makes pricing errors that they can’t predict or scrutinise?
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How Are Airline Tickets Priced – When Do Ticket Prices Drop and Increase?
Below are some basic pricing scenarios that influence when airline ticket prices drop and increase:
Scenario 1
Airlines have learned that overcharging customers for airline flight tickets is just as bad for business as under-charging customers for airline flight tickets. Fewer seats sell when airline flight ticket prices are too high. Flights barely cover their costs because more seats are vacant. Airlines run on pretty thin margins due to the high cost of operations. Fairer airline flight ticket prices are more profitable for airlines than price gouging.
Scenario 2
Airlines don’t want airline flight ticket prices to be too low either. If they sell seats too quickly at highly discounted rates, they’ll lose money. Airline flight ticket prices follow pricing cycles and trends. Dropping prices on an upward turn in the price cycle will lead to missed yield management opportunities and even margin loss.
Airlines try to avoid discounting too soon and too much during a price cycle because they’ll be in danger of selling below cost and running unprofitable flights.
Scenario 3
Airlines are very cautious about missing golden pricing opportunities. Most airlines want to exploit the increasing demand for seats or flights. It is common for airlines to add incremental amounts to airline flight ticket prices during an upward peak – otherwise known as yield management – to make more profit contribution dollars per flight.
Scenario 4
Without objective competition, market, and customer intelligence, airlines find it very difficult to know by how much they should drop airline flight ticket prices or increase them. If an airline doesn’t take their competitors’ airline flight prices into consideration when they load their prices into the system, there’s a risk of them being noncompetitive and slow to react to the market. When this happens, competitors swoop in on other airlines’ customers, capturing the other airline’s ‘share of wallet’ opportunities.
Scenario 5
If there’s an unusual spike in commodity prices, airline flight ticket prices can waver too. If commodity prices go up all of a sudden, airline flight ticket prices may also take a sharp increase. However, a decrease in costs captured by the airline’s fuel procurement team or passed on by fuel providers means airline flight ticket prices may also decrease or stay the same.
Note: Price drops and increases like this are associated with airlines that use a cost-plus pricing strategy, i.e., they set their airline flight ticket prices by adding a markup to their cost.
A key danger of a cost-plus pricing strategy in a volatile pricing market is that there’s an increased danger of airlines underselling inventory when the commodity market is low and overcharging when the market is high.
Scenario 6
Prices also change when airlines need to balance their capacity. If an airline has limited network capacity, it may choose to increase prices to inhibit customer demand. If an airline has full network capacity, conversely, they may choose to lower prices to sell a larger proportion of inventory upfront for guaranteed cash flow (if that is the strategy or commercial requirement at the time).
What airline ticket pricing strategy is used to set prices?
The airline industry is experiencing a lot of changes at the moment. Airlines are optimising everything (operations and business model), including how they price their airline flight tickets. Many airlines, for example, including mid- to small-sized airlines, are updating their CRM systems and e-commerce strategies. They may buy new ones to keep up with:
- Changing markets
- Buying patterns
- Demographics
- Digitisation
- Customer preferences
It’s a tough challenge to implement an effective dynamic pricing strategy in the airline industry. And even though we think airlines have been doing dynamic pricing for ages (and that implementation should be easier for them than other industries), they haven’t been doing dynamic pricing quite the way we thought they have.
Here’s why…
For many years now, a traditional airline pricing strategy was (and still is for some airlines) quite a manual and simple process.
Traditionally, airlines relied heavily on predefined fare classes and inventory controls, with different fare levels becoming available as inventory was sold. There was very limited real-time analytics going on and no accurate view of demand.
Instead, inventory allocation and airline pricing were also mostly manual and predefined. Seats at a higher price level sold once the allocation of seats at a lower price level was sold out. Insight into consumer demand showed it wasn’t based on a fixed allocation and pricing system. It gave the impression that the prices for seats were going up when really it was just another bucket of seats being sold.
Some airlines continue to price using traditional airline pricing strategies. This is because dynamic pricing is actually incredibly difficult to figure out and implement in real-world commercial situations. The difficulty involved is a barrier to airline pricing innovation and progress – the complexity of implementing dynamic pricing can create challenges for airlines seeking to modernise their pricing processes and systems (as discussed above).
How Are Airline Tickets Priced – Why do airline ticket prices change daily?
This is where automated pricing and price optimisation systems can play a role. Airlines can use increasingly sophisticated pricing technology to analyse demand, capacity, booking patterns, competitive information and other commercial factors when setting or adjusting fares. The goal was to optimise their airline flight ticket pricing for profitable revenue growth.
Airlines are increasingly exploring automated and AI-assisted pricing technologies as part of broader efforts to improve revenue management and pricing decisions.
To implement a dynamic pricing strategy to market (online or with agents), big airlines and even mid-sized ones need high-powered systems. Many airlines have bought or are considering buying AI-powered pricing systems to help them improve their pricing and overcome challenges (discussed above).
AI-powered pricing systems help airlines automate simple pricing tasks like price reviews or price changes. It does this by basically learning to do what traditional airline pricing teams do – but much, much faster. It then uses algorithms, machine learning technology, and big data to make these simple pricing decisions much faster and supposedly much more effectively than people can (i.e., not as many mistakes).
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What price optimisation techniques do airlines use in their airline ticket pricing strategy?
An algorithm is the starting logic for an AI-powered airline pricing strategy. It basically works out how much an airline should price airline flight tickets and then updates the system automatically using complex mathematical models. It also learns more about industry dynamics while using what it knows to optimise customer prices and revenues over time.
Revenue managers tend to monitor price elasticities and measure willingness to pay across different customer and price groups – when the customer is likely to pay the maximum price to buy one unit of a product. The AI-powered pricing system then looks at past price and volume data (at the bare minimum) and competitive airline price movements. It then decides on the best airline flight ticket prices at the time based on this data. This includes calculating different scenarios and weighing up dynamics in a particular geographic area and/or customer segment.
A sophisticated airline pricing strategy is pre-populated with “business constraints” which the algorithm is programmed to recognise and learn. Constraints can include price floors and fences, margin differentials, revenue targets, financials, ratios, thresholds, network capacity, coverage, etc.
Business constraints are generally customised to the organisation, industry and market requirements. However, the accuracy of the pricing system is largely dependent on the maturity of the organisation. This includes the knowledge and capability of the pricing or revenue manager leading a transformation project.
Who should be accountable for mistakes in how airline tickets are priced?
An AI-powered airline pricing strategy sounds great, doesn’t it? But an AI-powered airline pricing strategy doesn’t always work out as airlines expect. As the Cathay Pacific example at the start of this article indicates.
If Cathay Pacific’s pricing mistake was due to an algorithmic problem (not a marketing gimmick), something was clearly amiss. It could be that Cathay Pacific’s pricing algorithm was discounting its airline tickets excessively. This could have been a response to intense competitive pricing activity during the busy and highly competitive holiday season. It could be that their AI-powered pricing system had not adapted to new market conditions.
Why Do AIs Make Mistakes?
A common reason why AI-powered pricing doesn’t work out well for some airlines is simply because of bad data. If you put junk into an AI-powered pricing system, random junk comes out. Data warehousing and objective market intelligence are critical to implementing an effective airline pricing strategy.
A more complicated challenge is that some advanced machine-learning systems can be difficult for people to interpret, particularly when models use large amounts of data and complex relationships to generate recommendations. There are lots of unknown mechanisms driving AI pricing. Often people don’t or can’t understand them.
Learning curves of AI-driven pricing
Not knowing how an AI-driven airline pricing system views, understands and learns is a massive risk to us. Yes, we can review the mathematical model at first instance to understand the logic of the algorithm. But after this, when the machine starts learning, things get very murky. This is where AI takes over from us. Complex machine-learning approaches (like deep learning) are very difficult to follow for human beings. Even how AI learns everyday simple price review and uploading tasks is incredibly difficult to follow.
Complex machine learning approaches represent a fundamentally different way to program computers. An AI-powered airline pricing strategy system does not just do what you ask it all the time. Rather, it learns about the market by basically programming itself. From here, AI pricing makes its own pricing decisions.
This can make it more difficult for pricing teams to understand why a model produces a particular recommendation, particularly when multiple customer, competitive and market variables influence the outcome. However, they remain fundamental tools for pricing in an age where things move at the speed of light and new information is constantly accessible at the palm of your hand.
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Implications
In order to avoid getting caught up in the firing line, airline pricing teams need to know how to work with AI systems. This requires a complete redefinition of pricing roles and team structures inside the AI pricing organisation. This is a complete mindset shift for everyone involved.
If your business has bought AI-powered pricing, then basically the new mission of a pricing team is to teach the system everything they know about pricing. Make sure your pricing team is teaching it well and not just passing on all legacy pricing structures and unhelpful cost-plus thinking.
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Tips to help your pricing team work with AI-powered pricing systems:
First, you need to train the system to perform simple pricing admin tasks by doing lots of manual and often boring price reviews multiple times a day and every single day.
Second, you need to explain the outcomes of those pricing tasks by showing the basis of your decisions, i.e., your analyses and assumptions, pricing models, financials, price differentials, pricing structures, etc. This is a very time-consuming thing to do, especially when the results are counter-intuitive or controversial.
Finally, you’ll need to have the skills, knowledge or capability to use the AI pricing system competently and responsibly. For example, your pricing team must be vigilant at all times. They must be on top of the system and know how to quickly correct AI pricing errors before they spiral out of control. Or before unwanted media attention, as illustrated by pricing errors such as the Cathay Pacific incident discussed below.
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Bottom Line
Airline flight ticket prices change because all airlines face the same challenge. They need to lower costs and maximise revenues while improving customer service. It’s also a highly competitive and unstable market. Price optimisation techniques help them do this.
Based on our experience with AI-powered pricing, we believe that assistive AI can support pricing decision-making when used appropriately. However, automated decision-making can also introduce significant risks. Businesses investing in AI-powered pricing should take care when designing their pricing architecture and establishing appropriate controls before rolling out automated pricing.
Fundamentally, AI pricing is learning what you ask it to – and your job is to make sure it’s learning all the right stuff.
Businesses with AI-powered algorithms currently re-designing their price architecture should thoroughly screen and assess individual pricing team members for relevant skills, capability, and knowledge. This includes making substantial improvements to your current hiring process for the head of pricing roles.
If you would like to learn more about how to improve your pricing capability in your business, download our complimentary e-book five ways to double EBIT or our free pricing recruitment guides.
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Did you know that…
How you set up and recruit strategic pricing managers and analysts is a key determinant of how fast you can accelerate earnings growth. With the right pricing team strategy and implementation in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6-12 months, the team is often able to find additional earnings by identifying more complex and previously unrealised revenue and margin opportunities.
For a comprehensive view of building a great pricing team to prevent loss in revenue, download a complimentary whitepaper on A Capability Framework For Pricing Teams.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
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