<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by 7E7:
YYCOllie, I was not refferring to the person that is willing to pay top dollar for a fully flexible ticket with all the bells and whistles. I was referring more to the person who if the price is right might have their seat on a plane, otherwise they won't. Why not have more web savers that are very restricted to get those incremental dollars. You will still have those willing to pay for the convenience of a full a fare ticket weeks and right before a flight, but you also get this relatively low cost revenue.</font>
It all boils down to price discrimination and expectations theory.
The various fare levels volumes are dynamic rather than static. An airline's revenue management systems will sell those fare levels that passengers are willing to pay. If demand is shallower more will be allocated to a lower fare class than if demand is high: price discrimination where some are more willing to pay more than others.
I agree that you would think that, as you get closer to departure, prices should drop, especially if the flight is already 'in the black', as you say. The trouble is that, if it were known that prices would drop close to departure, very few passengers would buy in advance, everyone hoping to benefit from the final price cuts. Only those that were tied to an itinerary would buy tickets in advance. Others would just take advantage of the bargains close to departure, eventually you'd get a seat.
This strategy is completely inconsistent with an airline's ability to price-discriminate. If the byzantine fare structures were changed, this would as well.