The algorithms are based on history. I have worked with the computers for the UA, Delta, and USAirways and hotels have similar systems.
Basically the data is fed into the computer, the weather, the number planes, the number of passengers (pax) and a whole host of other things.
Then the computer says:
Today looks like this:
On the last day that looked like today this is what happened.
It then presents the extremes from high sell, to low sell on days that were exactly like that. Then it gives an average and the computer suggests prices.
Now you have revenue managers. These were once called reservations managers they mange the computer. The longer the system runs the more accurate it is, because it has more data.
Most systems run automated, airlines update every 10 minutes (though some may wait as long as an hour). Hotels can do any updating from 15 minutes to once a day.
So in otherwords at 2pm you call get a price, and the reservationist or computer system says “On this day this is what happened.” When you call back at 2:15pm it’s different because the computer updated and the day at 2:15pm is different from 2:00pm
To fully understand this, remember the Internet and over the phone reservationists also record turn downs. For instance, if you call in at 2pm and get a quote and say “that’s too high,” the reservationist feeds that in as a “Price turndown.” If you say “Thanks I was just looking” the reservationist feeds in “inquiry only.”
Obviously when you’re online the turndowns are less precise and are weighted accordingly.
So at 2pm you may have had, weather conditions are this, sold seats are this, reservations pending are this, and turn downs are this number (also many other things are in there don’t forget)
As you can see by 2:15pm that will have changed.
Airlines and hotels have revenue managers to watch this seed. For instance September 11th 2001 and the days after have to be completly thrown out of computer data, 'cause they are so unusual they’d make the “seed” of data less accurate.
Revenue managers bonuses and other bonuses are based on sells. A perfect sell will get you a high bonus. The number of “walks” or “bumps” will push this bonus down. So revenue managers have a lot of pressure to be accurate.
My biggest beef with this system is it assume the past will always be the same as the future. My gripe is dissmissed as “That’s why we have revenue manager to imput odd things into the system to keep it accurate.”
And it does seem to work. Revenue managers are really looked at. It’s always I saw two empty seats on the plane, WHY did that happen and what could you have done to sell them? You constantly have to justify your work to your bosses so it’s kind of a pressure job.
As for fees, I used to do Six Sigma work and those are put in simply because they can. Whatever passengers will tolerate is put up with.
I’ll give you an example from hotels. In NYC and Chicago, hotels will often charge to hold your luggage. Outside of the bigger cities most people will balk at this and those hotels don’t charge.
When I worked for Starwood, we put coffee in the rooms. We found that in Westin and Sheraton guests simply would not tolerate having to pay for that coffee in the room. However at the upper scale “W Hotels” brand, the coffee bag was placed in the mini-fridge and costs. Why? Simply because the type of person that stays at a “W Hotel” will pay for it.
Prices for airlines and hotels are just an example of “extreme” revenue management, but it exists in most places. For instance, resturants offer early bird speicals, to fill tables. The oil change place I walk by gives you $5.00 off to come in at posted time. Stores have sales and will often matched published prices.
It seems more resonable simply because they prices jump only once a week or less.