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I remember this question from grad school, but now I don't remember how this actually works. My thought was they work on supply/demand and then the prices adjust based on that and based on how close it is to the departure date. However, I'm not sure that it's as clear cut as that.
For example, I am looking to travel for the Holidays. I see that the ticket prices are fairly low right now, but we are still 5 months from the travel date. So the dilemma is purchase now or check back every day and risk that the price might go higher.
I've priced out hypothetical itineraries in the past and it seems that prices fluctuate quiet a bit. Even though it says "2 tickets left at that price" I'll come back a week later and again see that price.
From what I understand, it's supply and demand to the minute. Meaning, prices can change multi times a day depending on the time.
Most tickets are purchased Fridays and Saturdays in the morning, which makes that time the most expensive time to buy. Purchase your tickets Tuesday or Wednesday evenings (after 10pm).
Monday, Thursday and Sunday are the most popular days to fly. Fly Tuesday and Saturdays for the less expensive pricing.
The prices are less expensive for the holidays this far out, to entice people to purchase early. It's a marketing gimmick to create a lower supply for people who are booking their flights in October - November when most people are thinking about the holidays.
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Yes, like hotel rates, they can change daily. Airlines don't want to fly half-empty so will discount flights at less popular times/days, and jack up the prices when demand is high. Generally it's not going to drop in price as you get closer to the booking date, especially on popular routes. If you ever had to book a day or two before to go to a funeral or something you know it can be 2-3 times as much as if you had booked 6 weeks before.
Farecast.com used to have a 'price predictor' which would give you the probability that the airfare for a specific route would rise or fall over the next 7 days. Unfortunately, Microsoft bought them, integrated them into Bing Travel and then eventually killed them off after Google acquired their data source.
In addition to what's been stated, there are dozens of individual booking classes within a particular cabin, which further complicates fare prediction.
Figure that one out and you will win a Nobel Prize.
There are hundreds if not thousands of computer programs airlines run that come up with the numbers.
I actually don't think it can be that difficult, I think the difficulty comes from the fact that it changes constantly.
Sometimes, I will check a fare for the same route a few times in a day and then it goes up. I have a feeling that they also base prices on how many times that route comes up in searches in a certain amount of time.
All these theories could be true, but rarely are. The systems have some fairly simplistic algorithms built into them which will cause some minute by minute fluctuations, but they are more related to amount of supply. For example an airline might have a route that is heavily used by business people who history shows will buy tickets 1-4 days before the trip. If the system feels the supply of seats will run out before the 4 days before window opens it will raise prices. You might say that is supply/demand driven, but really its about pleasing their most valuable customers. If you aren't price sensitive like many business travelers, the only thing that matters is there a seat when you need one so if your airline of choice isn't providing that they know you will wander off to others. Losing a business client because of lack of availability is by far the biggest problem and airlines won't think twice about upsetting leisure travelers with pricing changes and high fares to prevent losing the real profit maker.
The rest of the pricing moves are just generic get what you can when you can stuff that are pretty broad and not that advanced. Most of the time the moves in prices are just matching what others are charging. Others will just come up with nice round numbers like fly for $99 which then becomes a temporary standard price. What has changed is all the fees. So now airlines correctly realize a ticket on their airline isn't the same thing as a ticket on Spirit and they also know that the buying public realizes this. So they will match what they consider comparable product and it adds a layer of pricing competition and possibly confusion to the buying public.
These advisors saying buy or sell are not as advanced as one might think either. They are just looking at history and judging how often prices are above or below the current level based on the time window. The advisors don't know that a big convention will be in Las Vegas or Chicago in a given week, they just know the prices are higher than normal so they will say to wait for the price to come down and it may never be lower.
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