Supply and demand shocks in airfare pricing during COVID-19 recovery
Two distinct scenarios present themselves as corporate air travel resumes and the possibility of them flipping backwards and forwards. One if supply outstrips demand and the other if demand outstrips supply, each with their own nuances to cause major price fluctuations in air pricing.
Airfare pricing systems such as Amadeus’ Altea Fares and Pricing Engine or Sabre’s AirVision Fares Optimizer, whilst comprehensive by historic standards, haven’t encountered situations such as the one currently enveloping the travel industry. These systems were built to look at competitive markets at a time with stable supply and steadily rising demand.
We’re likely to see wild fluctuations in price as both demand- and supply-side shocks push these systems to their limits.
Demand for air travel is already increasing but demand is currently driven off more than just necessity; demand is also impacted by government travel restrictions, duty-of-care policies, as well as being impacted by what the leisure travel sector is doing.
It’s not unreasonable to see a scenario where government flight restrictions are lifted in country blocks as we’ve seen with New Zealand and Australia as well as bilateral restrictions such as those that were renewed yesterday by the United States and Canada.
But even these restrictions may fluctuate causing demand-side shocks that significantly impact the recovery of air travel.
Daily or weekly changes to demand such as we’ve seen in recent months will lead to potential over- and under-supply of capacity, which will make it difficult for businesses to ensure their travelers who do travel get the best market rates for their future flights.
Air travel supply is normally very consistent with a high proportion of airline fleets operating at any given time.
With aircraft mothballed and limited engineering capacity, it will take significant effort to bring fleets through the bottleneck at a pace that matches air travel demand. There is a high chance that supply will either outstrip demand by bringing a fleet back too early, or airlines will not be able to match demand, driving up prices in the short term.
Given that currently supply is not just a function of total set capacity, it is also a function of middle-seat restrictions it is also unlikely that all airlines will be able to fly at close to full load factor again limiting supply to the industry.
It’s important to also realize that turnaround times may also be adversely impacted, with higher cleaning standards and sanitisation capacity could also be further reduced by the need to demonstrate a higher duty-of-care as regards to cleanliness on board.
The effect on pricing
Airline pricing will be in a state of flux for the foreseeable future compounded by the need to recoup losses and significant volumes of unflown tickets, vouchers and converted soft dollar accounts.
FairFly currently sees around 4% airfare savings for clients using its fare auditing tool, Faresaver due to normal fluctuations in market pricing but we’re already seeing higher-highs and lower-lows in the market allowing price assurance products to capitalize on this uncertainty. The current proliferation of flexible fare rules also enables more options when it comes to rebooking lower market prices.