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 backward and forwards. One if supply outstrips demand and the other if demand outstrips supply, each with its nuances to cause significant price fluctuations in air pricing.

While comprehensive by historical standards, airfare pricing systems such as Amadeus’ Altea Fares and Pricing Engine or Sabre’s AirVision Fares Optimizer haven’t encountered situations like those currently in 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-side factors


Demand for air travel is already increasing, but demand is currently driven by more than a necessity; the market is also impacted by government travel restrictions, duty-of-care policies, and 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 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, making it difficult for businesses to ensure their travelers who do travel get the best market rates for their future flights.

Supply-side factors


Air travel supply is usually very consistent, with many airline fleets operating at any given time.
With aircraft mothballed and limited engineering capacity, bringing fleets through the bottleneck will take significant effort 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.

Supply is not just a function of total set capacity but also a function of middle-seat restrictions. It is also unlikely that all airlines will be able to fly at close to complete load factor, again limiting supply to the industry.
It’s essential to realize that turnaround times may also be adversely impacted, with higher cleaning standards and sanitization capacity could also be further reduced by the need to demonstrate a higher duty of care regarding cleanliness on board.

The effect on pricing


Airline pricing will be in flux for the foreseeable future, compounded by the need to recoup losses and significant volumes of unflown tickets, vouchers, and converted soft dollar accounts.
Oversee currently sees around 4% airfare savings for clients using its fare auditing tool, Faresave,r due to normal fluctuations in market price. However, we already see higher and lower lows in the market, allowing price assurance products to capitalize on this uncertainty. The proliferation of flexible fare rules also enables more options when rebooking lower market prices.

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