Why is Airplane Fare A-B-C-D Often Cheaper than B-C?

[Hornbein]

Suppose there is a series of flights from A to B to C to D. Often the fare to do this is less than the fare from B to C. Can anyone explain why this pricing is common?

 

[Vanadium 50]

Yes. Airfares are not set by "cost plus fixed margin". They are set up on supply and demand. This is why the same flight might cost twice as much if it doesn't include a Saturday night stay - you don't even have to go to odd routings.

 

[phinds]

There have been instances where a one-way flight from A to B costs X and a round trip A->B->A costs .6X

Air fares don't always seem to make sense.

EDIT: Also, as I now recall, a more practical (useful) version of the OP is when A->B costs X but A->B->C costs .6x --- doesn't work if you have checked in luggage though because although you can just get off at B your luggage will end up a C.

 

[Vanadium 50]

Further, if you are flying A->B->C, the airline can put you on a direct A->C flight and you have little or no resource. To a lesser degree, they can sometimes put you on A->D->C, although usually one has a little more say in that.

 

[BWV]

The airlines have complex pricing mechanisms based on the fact that the costs are largely fixed so the marginal profit on an additional seat is near 100% once those fixed costs are covered. American Airlines pioneered this in the 80s, utilizing what at the time were supercomputers.

https://www.tts.com/blog/yield-management-in-the-airline-industry/

Other industries do this as well - Apartment complexes will raise or lower rent quotes based upon their occupancy the seasonality of move-in and/or move-out dates

 

[jbriggs444]

Suppose there is a series of flights from A to B to C to D. Often the fare to do this is less than the fare from B to C. Can anyone explain why this pricing is common?

I consider it a variant of "segmenting the market".

In a more generic context, where you are selling widgets to consumers, it is useful if you can sell Premium Widgets to rich customers and Bargain Widgets to poor customers. Rich customers are willing to pay extra money for a little extra convenience or perceived quality. You can harvest money from that willingness. Poor customers are willing to sacrifice convenience and brand loyalty for lower prices. You can sell your excess inventory to them as long as it is still above your marginal cost. Governments sometimes frown on such pricing strategies [people can get upset when they perceive unfairness]. As a result, you may have to be devious about it.

e.g. You sell Kraft Macaroni and Cheese with non-standard macaroni shapes, non-standard box sizes, different artificial cheese color and differently targetted advertising at five times the price per ounce of a box of store brand Mac&Cheese that is hidden on the bottom shelf. [Guess which product I buy].

An airline does this with pricing rules about advance purchases, last minute purchases, weekend stays, holiday blackouts, standby fares, cancellation fees, coach, business, first class. Anything so that they can separate customers with one demand curve from customers with another demand curve and put them into different markets. This let's them squeeze as much from each class as possible while still striving to keep every seat full. [I am certain that they also juggle the prices dynamically trying for that sweet spot where they sell the very last seat at the very last moment for whatever the market will bear].

If you have have very little demand on your A => D route and only low-paying customers want that route or if you are competing with some other airline for traffic between A and D, you need to price that route low.

But if you have no competition on the direct B => C route and there are business clients willing to pay darned near anything for a non-stop flight from B => C then you do not want to cannibalize your own sales by letting those passengers use an A => B => C => D ticket. So you force them to purchase an expensive B => C ticket. If such a passenger tries to use a cheap A => B => C => D ticket and are a no-show for the A => B flight, you cancel their reservation and ticket for the B => C leg while rubbing your hands together and cackling evilly.

If the passenger is smart enough to book C => B => A on a one-way ticket back and is a no-show on the B => A leg then rubbing of the hands and an evil cackle may be possible in the opposite direction.

 

[256bits]

Suppose there is a series of flights from A to B to C to D. Often the fare to do this is less than the fare from B to C. Can anyone explain why this pricing is common?

Good answers indeed.

There is also this,
A<->B<->C<->D

A<->B and C<->D can be popular routings for people and the plane can be made full.
B<->C might not have as much traffic, and the plane not full. It could be considered a feeder route for the other destinations.
One way to do that is utlilize a smaller plane which means smaller gross revenue vs considerably similar costs -ie pilots, stewards(ess) , landing fees, servicing costs.
Or, use the same larger plane with most people getting off at B or C ( whether they started from A or B ). The larger plane travels less full on B<-C>, but those customers having paid A to D have their marginal revenue already factored in by the airline. The new passenger pay for a larger proportion of the expenses listed above since their marginal revenue for the company, and costs of the company are not the same as the passengers flying through - ie less passengers -> the more each has to pay.
( ie take a taxi yourself, or with 4 people - the fare ios the same but you end up paying less as a group )