How Airline Pricing Works: What Product Managers Can Learn from Revenue Management
- product management
- 4 min read
Mayank Dubey – Manager - Ecommerce Pricing at Air India Limited
Two passengers can sit side by side on the same flight, in the same cabin, and one may have paid three times what the other did. From the outside, that looks arbitrary. From inside an airline’s commercial team, it is the visible result of one of the most sophisticated pricing systems in any industry.
Revenue management (RM) exists because an airline sells capacity that is both limited and time-bound. Once the doors close, an empty seat can never earn revenue again. At the same time, the people booking that flight differ widely in their needs, their flexibility and what they are willing to pay.
Having worked in airline commercial and retail, with a particular focus on revenue management, I find this raises a genuinely interesting product question: how should an airline match fixed capacity to shifting demand while creating the right commercial outcome?
The answer has lessons that reach well beyond aviation.
Airline Pricing Starts With a Perishable Product
A seat exists as a commercial opportunity only until the flight departs. Unlike a product sitting in a warehouse, it cannot wait for the next customer. Its value moves toward a fixed expiry point, and the airline has to decide what to do with it long before it knows how full the flight will be.
Flights typically open for sale around a year before departure, and bookings arrive along a booking curve. Price-sensitive leisure travellers tend to book early. Business travellers and people with urgent needs tend to book late, often in the final two or three weeks. The shape of that curve differs by route, season, day of week and even time of day.
This is the core tension. The airline has to decide how much to sell early, at lower prices, while protecting enough seats for later customers who may pay more but have not yet shown up.
The central questions revenue management tries to answer are:
- How much demand will emerge, and when along the booking curve?
- How much capacity should be available at each price point?
- How does willingness to pay differ between customers?
- When should lower-priced availability be opened or closed?
- How should revenue opportunity be balanced with customer choice?
These are not simply pricing calculations. They are decisions about customers, value and trade-offs.
How Airlines Actually Control Price
A common misconception is that airlines change the price of a seat minute by minute. Traditionally, they do something subtler: they control availability.
Prices are filed in advance as a ladder of fares, each tied to a booking class, also called a reservation booking designator (RBD), identified by a single letter such as Y, B, M, H or Q. An economy cabin may have a dozen or more of these classes, each with its own price and conditions. What the customer sees as a “price change” is usually the cheapest class selling out or being closed, so the next class up becomes the lowest available fare.
These classes are nested. A higher-value booking can always take a seat that a lower class could have sold, but not the other way round. The RM system sets protection levels: how many seats to hold back from lower classes for higher-paying demand still expected to arrive. Classic approaches such as Expected Marginal Seat Revenue (EMSR) compare the fare on offer today with the expected value of keeping that seat for a later, higher-paying customer.
More advanced systems use a bid price: a single threshold value for the next seat on a flight, recalculated as bookings come in. Any request whose value exceeds the bid price is accepted; anything below it is declined. The bid price is effectively the airline’s estimate of the opportunity cost of selling that seat now.
For product managers, this is a useful idea. The right price question is often not “what is this worth?” but “what do I give up by selling it now, to this customer?”
The Same Seat Can Represent Different Value
One of the most useful lessons from airline pricing is that the physical product does not determine what a customer is willing to pay.
One traveller has flexible dates and prioritises price. Another must be in a meeting at 9 a.m. and values convenience above almost everything. A third cares most about being able to change the booking if plans shift.
Airlines separate these customers with fare fences: conditions that make a cheaper fare attractive to one segment and unattractive to another. Classic fences include advance-purchase requirements, minimum stays, Saturday-night stays, change fees and refundability. A business traveller could technically buy the cheapest fare, but the fences make it a poor fit for how they actually travel.
Modern airlines package these differences into fare families or branded fares, such as Light, Standard and Flex. Each bundles a different combination of baggage, seat selection, changes and refunds. The customer chooses the level of value that suits them, and the airline captures more of each segment’s willingness to pay.
This is why pricing cannot be understood by asking “What does this seat cost?” The more useful question is “What does this journey and offer mean to this customer in this context?”
Product managers face the same issue. Two customers can use the same product and get very different value from it, and a good pricing structure lets each of them self-select into the option that fits.
Revenue Management Is a Trade-off Problem
Pricing decisions involve uncertainty because future demand is never known for certain. RM practitioners describe the two ways of getting it wrong as spill and spoilage.
Spill happens when too many seats are sold cheaply early. The flight fills up, and later, higher-paying customers are turned away or “spilled” to a competitor. Spoilage is the opposite: too many seats are protected for high-value demand that never arrives, and the aircraft departs with empty seats that could have been sold at a lower price.
Every availability decision sits between these two risks. Being too generous with low fares creates spill; being too protective creates spoilage.
Overbooking is a related trade-off. On most routes, a predictable share of booked passengers do not show up. Airlines therefore sell slightly more seats than the aircraft holds, based on forecast no-show rates. Overbook too little and seats fly empty. Overbook too much and the airline pays compensation, rebooks passengers and damages trust.
This structure is familiar in product management. Teams have limited resources and incomplete information, yet still need to decide which customers to prioritise and what to offer. Revenue management simply makes the trade-off unusually visible, because every decision touches a finite number of seats.
A Seat Is Part of a Network
For a network airline, a seat on one flight is rarely sold on its own. A seat from Delhi to London might be filled by a passenger travelling only Delhi–London, or by someone connecting from Bengaluru through Delhi to London.
Early RM systems optimised each flight leg separately. Modern systems use origin and destination (O&D) control, which asks a harder question: what is this booking worth to the whole network?
A connecting passenger may pay a higher total fare than a local passenger, yet use seats on two flights. If the second flight is nearly full, that connecting passenger may displace a local customer who would have paid more for that leg alone. The value of a booking therefore has to be measured against the revenue it displaces across every flight it uses. RM teams call this displacement cost.
The product lesson is that a customer’s value cannot always be judged in isolation. Some customers consume more of a scarce resource than their headline revenue suggests, and good pricing accounts for what they take, not just what they pay.
Pricing Needs Customer Context
Traditional segmentation tells an organisation who a customer is. Revenue management asks a different question: in what context is this customer buying?
The same person can be a price-sensitive leisure traveller in December and a time-critical business traveller in March. What changes is not their demographics but their situation. Understanding value means looking at:
- urgency of the need
- flexibility on dates and times
- available alternatives, including competitor flights and other modes of transport
- price sensitivity
- convenience
- the outcome the customer is trying to achieve
This is also why RM forecasts behaviour such as sell-up: the likelihood that a customer will buy a higher fare when the cheaper one is unavailable, rather than switching airline or not travelling.
For product managers, the reminder is that willingness to use and willingness to pay are not the same thing. A customer can find a product useful without valuing it enough to pay a particular price. Product discovery should explore economic value alongside functional value.
From Fares to Offers
For decades, airline distribution limited what an airline could sell through travel agents. Fares were filed in advance and distributed through global distribution systems (GDSs), largely as a price and a set of rules. Seats, bags, meals and flexibility were often sold separately, or not at all, outside the airline’s own website.
That model is changing. IATA’s New Distribution Capability (NDC) lets airlines build offers themselves and send them to sellers through modern APIs: a fare, combined with the right bundle of baggage, seats, flexibility and other services, priced for the context of that request.
The next step is Offer and Order Management. Today, a single trip can generate a passenger name record (PNR), an e-ticket and separate electronic documents for each extra service. IATA’s ONE Order initiative aims to replace these with a single customer order, closer to how a retailer handles a purchase. That makes it easier to sell, change and service complex bundles.
Together, these shifts open the door to continuous pricing. Instead of choosing from a fixed ladder of booking classes, an airline can price anywhere along the range, closer to what the RM system believes the seat is worth at that moment.
For product teams outside aviation, the parallel is direct. Instead of building one product and then deciding what it should cost, teams can think about how capabilities are packaged, what different customers value, and how the offer reflects those differences. Pricing becomes part of product architecture rather than a decision made after the product is defined.
Five Lessons Product Managers Can Take From Revenue Management
- Price on opportunity cost, not just on value. RM’s bid price asks what is given up by selling now. Product teams can ask the same about discounts, free tiers and capacity-limited features.
- Design fences, not just price points. Airlines separate segments with conditions, not just numbers. Usage limits, feature gates and contract terms do the same job in software and services.
- Segment by situation, not demographics. Urgency, flexibility and the outcome a customer wants explain willingness to pay better than who the customer is.
- Name both ways of being wrong. Spill and spoilage give RM teams a shared language for opposite risks. Product teams benefit from making their own trade-offs just as explicit.
- Treat pricing as part of the product. Offers, bundles and pricing are designed together in modern airline retailing. They should be designed together in any product.
Where AI Could Take Airline Pricing Next
Traditional RM systems were built on assumptions that are increasingly hard to defend. Many early models assumed that demand for each fare class was independent, so a customer who wanted a Q fare would simply not travel if Q was closed. In reality, customers compare options and buy up, buy down or switch airlines. Newer approaches model this choice behaviour directly.
AI could take this further in three ways:
- Better demand signals. Shopping data, search patterns, competitor fares and events can show demand forming before it turns into bookings.
- Offer-level decisions. Combined with NDC and continuous pricing, AI could help decide not only the price but which bundle to show to which customer in which context.
- Faster reaction. Fuel shocks, airspace closures and schedule changes can make last month’s forecast obsolete. Models that adapt quickly reduce the cost of being wrong.
The caution is the same for product teams in any industry. Optimising a metric is not automatically the same as creating value. A model that maximises short-term revenue per seat may erode customer trust or long-term loyalty. Leaders still need to decide which outcome matters, how customers are affected and which trade-offs are acceptable.
AI can strengthen commercial decisions, but it does not remove the need for commercial judgment.
Pricing Is Ultimately About Value
Airline revenue management shows why a price is never just the final number attached to a product. Behind every fare sit forecasts of demand, nested booking classes, bid prices, network displacement, overbooking decisions and increasingly, the design of the offer itself.
For product managers, the lesson is straightforward: pricing should not begin at the end of product development. Teams need to understand who values the product, what they value about it, the context in which they buy, and what they give up by selling to one customer rather than another.
Airline pricing makes these questions unusually visible. But the principle applies to almost every product business: strong pricing begins with understanding value before deciding the number.
