Using Historical Pricing Information to Make Better Air Travel Buying Decisions

Introduction

Over the last decade, the complex world of fares, flight schedules and seat availability has moved out of the realm of professionally trained travel agents and been thrust directly upon consumers. Armed with little more than a set of internet query forms and a grid of airfare prices, consumers are expected to make a buying decision with an incomplete set of information.

 

On average, a consumer shops 4 air travel sites for price quotes before purchasing. These results allow comparison shopping but do not convey whether or not a price is “reasonable”.  Most consumers have a sense of uneasiness about pushing the 'buy-it' button that charges their credit card for hundreds of dollars. Thoughts of ending up on a plane sitting next to a person that paid less can be disheartening at best. Airlines and online travel agencies are well aware of this purchasing anxiety but have yet to come up with a solution. The best they can offer are a variety of marketing gimmicks including low fare guarantees that are almost impossible to redeem.

 

This paper describes a practical and efficient approach using unbiased historical fare pricing information to better understand what a “reasonable” price is.

What Is Historical Pricing Information

FareCompare.com collects historical airfare pricing information for over 77,000 city pairs covering the U.S and Canada, with just shy of 5 million domestic U.S./Canada fares that can be updated up to 3 times daily. As of July 2006, we have collected 24 months of data.

 

Every day we perform analysis on the airfares for each city pair. We summarize the airfare pricing information in a variety of ways and the information is accumulated in a database for ease of access and distribution.

 

From this database, we can derive the lowest airfare on any given day, and that allows us to further derive minimum, average and maximum fares for entire calendar months or even years.

 

Typically, this type of information is presented in graphical form for ease of review and analysis. Below is an example of a trip search query between Denver and Detroit (queried on May 28, 2006).

 

 

The remainder of this paper discusses how best to use this historical information to make better purchasing decisions.

Step 1: What’s a Good Price?

“Beauty is the eye of the informed beholder”. Most consumers would not go shopping for a car without pulling up Kelley, Edmunds or a few newspapers to get an idea of what price point to expect. The average travel consumer has a sense for what they can afford based on their budget, but most don’t have enough experience to have a good “feel” for what is a “good” price for travel between 2 cities.

 

  • Don’t start shopping without at least knowing what a good price point is for the city pair you are researching for travel

 

We firmly believe that historical fare information is so vital to making a well informed air travel purchase decision that we include several visual cues based on historical fare information presented on all trip search result pages.

 

Every day, we analyze our air fare database to find the cheapest prices for each city pair across the U.S. and Canada. This daily analysis allows us to assign a low fare for each departure month for a city pair and compare it against all the previous historical daily prices so that we can quickly determine an overall ranking for a particular fare price. This overall ranking is the basis for our star rating system. FareCompare.com ranks the cheapest round-trip price for travel departing within each month and uses star rating icon  to denote the overall rank of that price.

 

 

This star rating system employs the following general algorithm:

  1. - (best) – Close to or better than the all time historical low price.
  2. - (good) – Better than the average historical low price.
  3.  - (fair) – Close to the average historical low price.
  4. - (mediocre) – Close to the all time highest historical low price.
  5. Unrated – higher than the all time highest historical low price.

 

  • If a fare is rated with 4-stars, purchase it as quickly as possible. This type of rating occurs very infrequently and you should take immediate advantage.

The decision making process on fares that are less than 4 stars is not so cut and dried. If the rating is 3 stars or below you should probably take a look at step 2 “Fare Trend Analysis”.

Step 2: Fare Trend Analysis

Using the same historical information as the star rating system, we can further derive the historical high, low and average “low” price for all calendar months in the database. When depicted in a graph this derived information produces 3 trend lines which are very handy in helping you determine the best purchasing options.

 

The graphs below show the 3 typical types of trends that will occur in most city pairs. For reference the blue line represents the highest low prices within each month, the red line represents the lowest low prices within each month and the black labeled line represents the average low prices for that month.

 

Trend Up

 

Trend Down

 

Trend Flat

 

The graphs are displayed with the preceding year of information so that you can interpret the trend using either a short or long term approach. You should always feel comfortable about purchasing on any of these 3 trends if the proposed purchase price point is both below the average (black line) and near the low (red line).

 

The absolute best time to purchase would be at one of the all time lows (red). In most cases these lows are completely random and short lived. The only method that will increase your chances of purchasing at these lows is to sign up for the FareCompare.com “Email Alerts”.

 

If the trend doesn’t match the best conditions for making a purchasing decision then you should move on to next step and examine the price volatility of the city pair.

Step 3: Price Volatility

In many city pairs the price can fluctuate from extreme highs to lows over a fairly narrow time scale. This normally occurs in city pairs where competition is high or an airline is trying to gain market share without worrying about short term losses. It can also occur when airlines with a small market share file low fares into the city pair in retaliation for low fare behavior they deem unacceptable in one of their high market share city pairs.

 

As general rule of thumb a “volatile” city pair is one in which the price fluctuates more than $50-$100 per month over several months. The difference (distance) between the blue high points and the red low points define the spread within a given month (see diagram below). If the average line (black) is nearer the either of these lines (minimum or maximum) it means the price was mostly at that high or low during the month, otherwise if it’s in the middle of the spread then the prices were evenly spread from high to low during the month.

 

 

 

Volatile

 

 

Stable

 

The first graph is a classic example of a highly volatile market. For this type of city pair you should try to purchase on one of the down swings during the month. It is important you use a tool like the FareCompare.com “Email Alerts” to make sure you are notified when these dips occur.

 

  • Using the star-rating, trend and/or volatility techniques will provide the required information to make a truly informed buying decision.

 

FareCompare.com also offers more advanced historical analysis which is briefly described in the next section.

Step 4: Advanced Analysis, Airlines and Departure Dates

Clicking on the trend graph will take you to the FareCompare.com historical analysis application. This provides the ability to look at a variety of ‘what if’ scenarios and to delve much deeper into all aspects of the historical information.

 

 

The application uses a simple line graph display with 4 sets of controls that allow you to:

  1. Change the city pair
  2. Display certain airlines
  3. Display prices based on future travel date at the time of data collection (Advance Purchase)
  4. Select the length of historical time to view

 

By default, when you enter the application display page, the historical data for the city pair that you were originally viewing is loaded with previous month of data and displays the absolute lowest price of all airlines regardless of the advance purchase.

The graph area will always have the red lowest trend line regardless of which options you select on advance purchase, airline or time scale. This line is there for comparison purposes.

If you would like to see what the walkup fare was for the last 2 years then you will need to click the “0-day” Advance Purchase Tab  and then the “2-year” Time Period Tab.

At any time you can add in an airline for comparison by clicking on the check box underneath the airline. All airlines that have filed fares into this city pair are listed at the top (you can also hit “select all” or “deselect all”). Once you select an airline a button will appear on the right which allows you to update the graph to show that airlines data compared to the low trend.

Step 5: Analysis Examples

    1. When Independence Air discontinued operations in January 06 the other airlines in the market significantly hiked fares and have continued to do so. The current $178 price is below the average price for the last 3 months, and in this relatively non-volatile market the chances for significant savings does not appear to be high. Recommendation: BUY
    1. When Southwest Airlines entered this market in October 2005, prices soon dropped as the rest of the airlines were forced to match Southwest's fares by reducing their fares by around half. The current trend is still driving prices down with low volatility. Recommendation: BUY.
    1. It’s a 4 star fare so it should be purchased regardless of trend or volatility. Recommendation: BUY.
    1. The trend graph shows two price point levels – around $198 for most of the last year, and more recently around $158 with the last month seeing an increase in price. The trend would appear to suggest that pricing will soon attain its historical plateau; therefore the 3-star fare of $198 is a good buy through October. Recommendation: BUY.
    1. Over the last year the average low price has meandered around the $200 mark with around $50's of volatility. This 2-star fare of $228, is likely to move down to its normal average of $200 and if you are lucky it can be had for $175.
    1. The $359 1-star and $399 unrated fare is several hundred dollars above the 1 year low. The trend is relatively flat but the range per month is several hundred dollars making it highly volatile. If alternate cities or driving is not an option then it should be purchased on a low volatile swing in the less than $300 range and if you are lucky in the less than $200 range.
    1. This $320 unrated fare is in a market where the trend has been upwards with low volatility since October 05. Purchase for June and July is painful but is probably as good as you are going to get.

Conclusion

Follow the simple set of guidelines outlined in this paper and you will save money, time and anxiety.

 

  • You don’t have to be an expert to be a savvy air consumer

 

Many people who look at historical information and seeing the chaos in prices wonder “Is there really is any rhyme or reason to airline pricing behavior”? To that question I can assure you for the most part there is a bit of method to the madness but it is sprinkled with a hefty dose of chaos. Several factors contribute to the wide disparity in pricing between city pairs including:

  1. Seasonality
  2. Load Factors
  3. Automated Matching of Fares by Airlines
  4. Low Cost Carriers
  5. Cut Throat Competition
  6. Market Share
  7. Demand

 

There will be future papers on the subject of traveler profiles like business vs. leisure and how these particular types of travelers should interpret historical information to make better buying decisions. For the most part the information presented in this paper is more useful for flexible leisure travelers with longer time frames to purchase. However, business travelers can quickly gain better insight by looking at the 0, 3 and 7 day advance purchase price ranges in the historical application.

 

You need to be aware that all these analysis techniques are based upon absolute lowest fares in the market and that these fares tend to have the most restrictions (Days of Week, Minimum Stay, etc). You should expect an up-charge from these low prices in the following conditions:

 

  1. You intend travel on peak days and times ($20-40)
    1. Monday Morning
    2. Fridays
    3. Sunday Evening
  2. In certain city pairs if you do not stay a Saturday night ($30-$100)
    1. Although in recent times this restriction has become less of an issue due to the pricing policies of low cost airlines which don’t tend to have Saturday night stay restrictions so competition has forced the bigger airlines to remove these
  3. International fares and a handful of domestic fares require are much different analysis technique because of seasonality and will be addressed in a separate paper.

 

It is also important to note that these low fares are subject to availability. The airlines closely scrutinize how many seats they offer at these low prices. The more planes fill up (or projected to fill up by business travelers) on a particular day the fewer seats they make available at these low prices.

 

Please send us feedback on the site and this paper mailto:info@farecompare.com.

 

Regards,

 

 

 

Rick Seaney

President, FareCompare.com