Travel: Why you paid pounds 276 for that pounds 58 air fare

It's simple. Inexorable market forces lead to the `value' of an aeroplane seat being as volatile as that of a ripe tomato.

HOW LOW can they go? This week Ryanair raised the Anglo-Scottish air stakes by cutting its lowest Stansted-Prestwick fare to just pounds 16.99 one way. The move is partly aimed at taking the wind out of Go's sails. On Tuesday, the new British Airways subsidiary starts flying from Edinburgh to Stansted, launching its first domestic route for a lowest fare of pounds 70 return.

It is between the English and Scottish capitals that competition is likely to be stiffest. For the first time, Go has gone head-to-head against another airline: KLM UK already flies the route, and has announced that it will undercut the British Airways offshoot by offering a fare of pounds 68 return on its 10 daily flights.

Fifteen years ago BA had the Edinburgh-London route to itself, flying when it felt like it, offering minimal in-flight service and charging more or less what it liked. Now travellers can only benefit from competition from British Midland on flights to and from Heathrow, KLM UK to Stansted and London City, and easyJet to Luton - not forgetting, of course, Great North Eastern Railways, which gets you from London to Edinburgh in less than four hours.

But why do the fares vary so much? For travelling the 350 miles between London Heathrow and Scotland's largest cities, A could pay pounds 58 return while B stumps up pounds 276 - and that's for seats on the same British Midland flight.

There are a couple of answers. The argument the airlines prefer to use is that A and B are buying different products. Traveller A must book a fortnight in advance, and stay over a Saturday night. The fare is restricted to off-peak flights, and does not allow for a change of either airline or flight.

Passenger B can travel on any flight and may return after an hour or a year, earning frequent flyer points in the process; he or she is allowed to switch from British Midland to British Airways with impunity, and can get a full refund.

The second, more revealing answer is the black art that the airlines apply to the highly perishable commodity that is an aircraft seat: yield management. It means squeezing the maximum revenue from every passenger on the plane, while trying to ensure no seat is left empty. The way they manage to do this is to segment the market and charge whatever each part of it will bear.

Imagine a market trader with a box of tomatoes. He or she knows that a certain proportion will be sold at full price to people who simply must have a good, ripe fruit for tonight's dinner. These customers equate to the business travellers. The price will be quietly reduced to entice buyers who are quite happy buying tinned tomatoes from the supermarket, but will buy them fresh if the price is right. The parallel is passengers who might otherwise travel by train.

Yet the trader still has some produce left. To off-load this before the rot sets in, he or she must cut the price still further to attract customers who hadn't been planning to buy tomatoes at all today, but will do so if they're really cheap: the "discretionary travellers". The trader keeps a few back because experience shows that there will always be a couple of last-minute panic buyers who will pay almost any price for the product they need. Result: a happy trader, who has maximised earnings.

The theory works just fine, until people start talking to each other and find that some have paid five times more than others. But the business traveller who becomes apoplectic at the thought of subsidising the backpacker in the seat next to him should realise that peaceful coexistence ought to prevail; each passenger is helping the other, by keeping fares lower or services more frequent than they might otherwise be.

The existing traders were not overjoyed when Stelios Haji-Iaonnou turned up three years ago, launching easyJet from Luton to Edinburgh and Glasgow. Its low one-way fares, plus the innovation of electronic ticketing, made Luton suddenly fashionable once more. The airline's lead-in fare of pounds 58 return from Luton to each of Scotland's four leading airports - Aberdeen and Inverness as well as Edinburgh and Glasgow - has set the benchmark for budget cross-border air travel.

Meanwhile, don't neglect the trains: when the winter timetables start for the railways (in three weeks), expect more sub-four-hour journeys between the Scottish and English capitals.

GNER's present pounds 35 return fare from London to Edinburgh for those prepared to book a fortnight in advance, and the Virgin Value ticket of pounds 30, show that there are few limits to market segmentation.

When Go's 900 seats a day are added to the market, there is a risk that some of the competition could be squeezed out.

But in the short term, all the competitors say that they're determined to compete - and they have the resources to back that up. Intriguingly, the most significant loser of Go's entry to the market could be its parent, British Airways.

Finally, recognise that domestic flights will never, ever win the battle for the best-value air fare. For the next three months, you can fly from London via Dubai, Colombo and Singapore to Melbourne for less than pounds 500 on award-winning Emirates. This works out at around 2p a mile, compared with a minimum of 12p a mile for the 700-mile round trip between Edinburgh and London.

Contact numbers: British Airways 0345 222111; British Midland 0345 554554; easyJet 0990 292929; GNER 0345 225225; Go 0845 60 54321; KLM UK 0990 074074; Ryanair 0541 569569; Virgin Trains 0345 222333