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Why So Few Last Minute Airline Deals?

I travel semi-regularly. I probably fly about about ten round-trips per year. Fortunately, it's reasonably affordable, because I'm always able to get great fares. When someone asks me for advice on finding good fares, I say three things. 1) don't travel on peak days (Friday and Sunday) 2) don't travel during peak seasons (Thanksgiving, Spring Break, etc.), and 3) book early.

(from mikecogh on Flickr)

Booking early is so much more important than a lot of people realize. It's almost never better to wait until the last minute, and there's good reason for it. Now, a lot of people would say, "isn't it in the airline's best interest to sell a seat at any price rather than to let it go empty during the flight?" The answer is no; and here's why:

Imagine two customers. Casual traveler will only fly if he get get a really incredibly low fare. The most he's willing to pay is $100. If he can't get that fare, he'll just stay home. Business traveler, on the other hand, got called by a client who is in the middle of a major emergency. She needs to be at the client's office tomorrow and is willing to pay whatever it takes.

Let's imagine it's the day before, and the airline prices the fare at $100 to "fill all the seats." Both travelers buy the fare, and the airline earns $200. Now let's say the airline instead charges $500. Casual traveler stays home, business traveler buys the fare, one seat goes unfilled, and the airline earns $500. Charging a really high last-minute fare is obviously more lucrative than offering a really low fare to fill the seats.

Now, this basic example might be oversimplifying the reality of the air travel market, but even in aggregate, the principle holds. If the airline were able to fully engage in price discrimination, they would charge casual traveler $100, business traveler $500, earn $600 and have no empty seats.

Of course, airlines already do this by offering the low fare to anyone who buys it in advance. But price discrimination is extremely difficult to do at the last minute, especially these days, when the internet makes fares extremely transparent. They might be able to dump some of them off on the gray market (ie. Priceline, Hotwire) but they won't advertise a super low fare.

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