Airfare costs: How airlines decide what to charge you for a flight

How does the price you pay for your air ticket square up against your airline's cost of getting you from A to B? Airlines need to cover their costs, make a profit for shareholders, provide for the future and keep an eye on what the competition is doing but that doesn't mean all seats on the same flight are sold at the same price. Far from it. There are many variables that go to make up the price you pay for your ticket, and chances are that two passengers in adjacent seats on separate bookings are not paying the same fare – which means wriggle room for savvy flyers looking to score a keen deal.

Fixed Costs

The cost of purchasing or leasing aircraft, staff, taxes, airport landing fees, insurance and aircraft maintenance are mostly outside an airline's control. Bigger airlines have more leverage when they buy or lease aircraft and low-cost carriers can pare some of these fixed costs, for example by shifting operations to a lower-wage zone such as Asia.

Variable Costs

Fuel

This is a huge part of an airline's operating costs, running around 22.5 per cent for airlines worldwide in 2018 according to Statista. Oil price volatility, which determines the price of jet fuel, is a cost nobody is big enough to tame.

Airlines frequently hedge fuel prices, buying or selling the expected future oil price through a range of investment products such as Current Oil Contracts, which means they don't lose out if the oil price rises, as is likely to happen at the moment. Sometimes an airline will add a fuel surcharge to their ticket price, which includes those paying for their ticket with frequent flyer points.

Aircraft type

Saturday, 24 March 2018: Qantas 787 Dreamliner first Perth to London flight has taken off, marking the start of the only direct air link between Australia and Europe QF 9 DEPARTURE FROM PERTH

A Qantas 787 Dreamliner. The 787 is highly fuel efficient. Photo: Brent Winstone

As oil prices become ever more crucial to an airline's bottom line, the quest to fly more fuel-efficient aircraft becomes a make-or-break exercise. A Boeing 747-400 burns 3.34 litres of fuel per passenger per 100 kilometres. For the Airbus A380 the figure is 3.16 or 3.27 litres depending on who you believe. The Boeing 787-9 chews through 2.31 or 2.49 litres per seat to cover that same distance while for the Airbus A350-900 sources offer a much wider variation, either 2.39 or 2.81 litres. Among medium range aircraft Boeing's 737 MAX-8 is a winner, burning a miserly 2.13 litres per passenger per 100 kilometres.

Flying aircraft with the right balance of seating capacity and fuel consumption is vital for airlines that want to remain in business while delivering keen prices in a competitive market.

Competition

Lack of competition allows an airline to show its fangs. When an airline has a route all to itself, or shares it with just one other carrier, the gloves come off and the customer gets hammered.

For example, the only airlines offering one-stop flights in under 15 hours between east coast Australia and Papeete in French Polynesia are Air New Zealand and Air Tahiti Nui, which both operate via Auckland. A return economy airfare from Sydney to Papeete in November starts at about $1740, from Melbourne about $2050. That's at least $700 more than the cheapest return economy fare from either city to New York, about 16,000 kilometres from Australia's south-eastern cities. Papeete is 10,000 kilometres closer.

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According to Skyscanner, a return flight from Bangkok to Bhutan's Paro in September will set you back just over $1000 – about the same as a return flight from Bangkok to London on the same dates.

The reason for these jaw-dropper prices is competition. There are at least a dozen airlines that will get you from east coast Australia to New York, including several China-based carriers that can fly you to New York City and back for around $1000, and that level of competition keeps prices low. In the case of Bhutan, only two airlines operate between Bangkok and Paro and the Government of Bhutan gets to say which.

Seasonality

Airline revenue managers divide all the seats on a particular flight into different price levels, or price buckets. In peak season a revenue manager will tip fewer seats into the cheapest bucket and these are usually the first to go. As departure time approaches, seats will usually become progressively more expensive.

Even when there are vacant seats on the cusp of flight time, airlines do not typically reduce prices to fill them since they earn far more revenue per seat from late-booking passengers. Most airlines would prefer to fly with expensive, unsold seats rather than filling them with low-fare paying passengers. If an airline was to discount seats at the last minute in order to fill them it would compromise their lucrative business model.

The Choices You Make

Who to Fly With?

Delivering quality inflight service, meals, entertainment and rewarding faithful flyers with reward points adds to your ticket price. So why not nix the lot? Just buy a basic seat and pay for any add-ons. Along with checked baggage, seat selection, priority boarding and any other non-essentials an airline can dream up. Which is the business model that has allowed low-cost carriers to carve a huge slice of the air travel pie from the service-oriented legacy carriers.

While low-cost carriers can undercut legacy carriers over short and middle-distance routes they're practically non-existent on long-haul routes, where operational realities make it tougher to offer low-cost fares.

When to Buy, and When to Fly

Air ticket prices fluctuate and when to buy your ticket is an inexact science that varies with destination and season but there are a few rules that apply across the board. Airlines generally release their tickets 11 months in advance and this is the time to score a deal. Ticket prices vary by day of departure, and even by the time of departure.

Some destinations are cheaper to fly to on a Saturday, sometimes it's a Wednesday. Fly an inter-city route used predominantly by business travellers and you'll pay more to travel with the suits early in the morning and in the evening rush. A flight search aggregator such as Momondo or Google Flight Search will tell you which are the cheapest days to fly.

See also: Why international airfares are the cheapest they've ever been

See also: Flying long haul? This is the plane you should look for

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