The Hindu Business Line : Why last-minute air travel is costly

My friend is a last-minute traveller. He ends up paying a premium on his air fare compared to those who purchase tickets in advance. He, however, gets a discount when he buys last-minute tickets to his favourite concerts. Quite intrigued, my friend wanted to know if economics can explain the contrasting price dynamics. Can it?

Maximising profits

All businesses have a simple rule — to maximise profits. Take a movie theatre that has 500 seats. Suppose a particular movie show has sold only 425 seats at an average price of Rs 80 per ticket. The theatre owner can let 75 seats vacant.

Alternatively, he can sell the seats at a discount. If he sells at Rs 50 per ticket, revenue will be higher by Rs 3,750. With low variable costs attached to the seats, the entire amount could add to the profits.

Such pricing could, of course, have some consequences. If the theatre offers such discounts as a policy, fence-sitters or price-sensitive customers could wait till the last minute to avail of the discount. That could bring down the average revenue and profits for a movie show.

Pricing policy

Not considering the consequences of such pricing, receiving a discount at movie theatres and concerts does not seem surprising, given the objectives of full occupancy and optimal profits. The airline companies are equally interested in filling their seats on each journey. And that means they should be willing to offer steep discounts to last-minute customers as well. So, why then is the price dynamics different?

Travellers typically purchase their tickets in advance. They pay a lower price but suffer a huge penalty for cancelling. Often, airlines do not give refunds.

Business travelers are different. Airlines have found that business travellers tend to reschedule their flights frequently and often end up buying tickets few hours before the departure.

Now, these travellers are less sensitive to prices than others. It, therefore, pays to charge a higher premium to the last-minute business traveller, for that maximises profits. Other last-minute travelers simply suffer the consequences of this pricing policy.

(The author is an investment strategist.)

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