cheaper airfare when you add a hotel

Wow, this totally confuses me:

For an economy flight from Dallas to Madrid on November 5-12, the best price available for airfare alone (on any airline) was $1,098 round-trip. However, American Airlines Vacations turned up packages starting at $931 for the same nonstop flights and six nights in a hotel. In other words, you’d actually save $167 by adding a hotel room. (It doesn't even need to be a hotel you intend to sleep in; unlike hidden fares, the airline will never know if you neglect to check in for the room.)

How do the economics of this work? Why is it in the airlines' best interest to offer lower airfares on vacation packages than on stand-alone flights?

The potential savings is even more dramatic when you fly in a premium cabin. For that same itinerary, a business-class ticket alone priced out at $3,850, while packages with a hotel started at $2,796 (for the same flights). A flight with six nights at the Radisson priced out at $3,272, so you’d be getting a discount of almost $600 off the regular price by adding the hotel.

Apparently these deals are more common on international fares, than on domestic flights in the U.S.

Mu first search at Skyscanner.com shows RT flights from DFW to Madrid at $640 in October.

Quote: reno

How do the economics of this work? Why is it in the airlines' best interest to offer lower airfares on vacation packages than on stand-alone flights?

Its known as the age of 'data and market capture'.

Some airlines don't make money flying a passenger, they make money by merchandising that passengers hotel and car rental and location data. So even as he arrives at the hotel, the 'special guest coupons' are tailored to his tastes such as restaurants, sight seeing, etc. The airline captures the passenger's car rental history and computers tailor everything to squeezing money out of some one for the airline's data.

Don't ever do this for a casino related trip. At least in Vegas, pay for your own hotel and the casino is likely to comp you your room, but if you prepay your room via the airlines or travel broker, the casino host can't do anything for you at all.

Also, be sure the search engine you are using is not set to present such deals to you first, make certain you get 'flight only' deals first.

Quote: reno

How do the economics of this work? Why is it in the airlines' best interest to offer lower airfares on vacation packages than on stand-alone flights?

I suspect that the are more an example of block allotment.

For example, sometimes it is cheaper for me to fly on a commuter prop 55 miles to Philadelphia and then take a flight to Europe then it is for me to drive to Philadelphia and park at the airport at my own expense, and take the same flight to Europe. This makes no economic sense, but there is a certain number of seats reserved for the transferring passengers. If these seats don't get sold as fast as the nonstops, they end up being cheaper.

Such block allotment is frequently refined by the airlines computers but has worked disadvantages. I was once flying one leg on a standby basis but a group of sixteen teenage girls and two chaperons were traveling and so the computer's "averages" were exceeded and I didn't have a chance, indeed the ramp agent slammed the plane's door right in front of me and told the two 'stand by's to get lost.

Quote: Pacomartin

This makes no economic sense, but there is a certain number of seats reserved for the transferring passengers. If these seats don't get sold as fast as the nonstops, they end up being cheaper.

I don't dispute your explanation, it's probably true. But it's madness, nonetheless.

In another thread I mentioned that sometimes a flight from Salt Lake City to Honolulu (with a layover in Los Angeles) is cheaper than a non-stop flight from Los Angeles to Honolulu. The algorithms that the airlines' computer use must assume that jet fuel is free-- surely it requires more fuel to move a passenger from Utah to Hawaii than to move a passenger from California to Hawaii.

Occasionally United charges more for a flight from San Francisco to Monterey, CA than from San Francisco to Tokyo. Because jet fuel is free...

Quote: reno

The algorithms that the airlines' computer use must assume that jet fuel is free-- surely it requires more fuel to move a passenger from Utah to Hawaii than to move a passenger from California to Hawaii.

Perhaps they found some phlogisticated fuel? It's not free. But as it weighs nothing, it allows the airline to carry cargo equal to the fuel's mass at takeoff for no extra cost :)

Quote: reno

In another thread I mentioned that sometimes a flight from Salt Lake City to Honolulu (with a layover in Los Angeles) is cheaper than a non-stop flight from Los Angeles to Honolulu.

Often those prices are based on competition.
SLC to HNL connection
Everybody sells that connection
UA through LAX
AA through PHX

If you have a connection and everybody has a connection, have to have a competitive fare to sell seats
If you operate a nonstop and competition has connection, then you can set a high price and probably still sell seats
Delta has a nonstop SLC to HNL

You assume that price is based on the cost, not on the value to the user.

Only for some fungible goods is that true, for most things, companies will charge what they can to sell the item/service. The only time cost is important for price setting is if the cost to provide X is higher than the price the market will pay long term.

Quote: terapined

Often those prices are based on competition.

So in the end it's all about supply and demand, and very little about distances and time, or fuel, or bags...

Back in the "Golden Days" of air travel, it was understood that connecting flights, as well as flights making several stops, were cheaper than non-stop flights. I wonder how many people still assume things are this way still, and then are surprised when this is not the case.