Will airline pricing algorithms start to drive up leisure travel airfares soon?
Air travel is coming back. Now that people are booking more regularly and following traditional patterns, some experts predict the airlines will return to pre-pandemic pricing practices.
What would that mean to you? Before the pandemic, airlines set prices algorithmically. This practice predicted booking patterns which allowed them to charge different prices for the same seat.
How do pricing algorithms work?
Through a complex set of algorithms, the airlines take a sort of two-tier approach to pricing. First, one department sets a range of prices based on the flight itinerary and fare class (Economy, Premium, Business, First, etc.) Then, another department chooses how many of the tickets in each category to make available for purchase. As one category fills up, they open the next, more expensive class up for purchase.
You’ve likely experienced this first hand. When you are shopping for airfares, remember so are others. And as people book, the prices go up – sometimes overnight or even within a few hours or minutes. This is why we’ve always recommended you buy when you see a good fare. There are only so many tickets at one price, and once they’re gone – they’re usually gone for good!
The airlines rely on areas of predictability like when people are likely to buy before a holiday, and exactly when people tend to visit family around these times to set the numbers of tickets at any given price point.
Business travel also affects price
Another segment of travelers that the airlines depend on are business travelers. Frequent business flyers tend to book last minute and have less of a focus on budget. This is the reason the airlines sometimes leave seats empty right down to the wire instead of offering deep discounts at the last minute. Business travelers also tend to avoid Tuesday and Wednesday flights – which can also explain why leisure travelers tend to find the best deals on these mid-week flights.
Where leisure travelers would swoop in and snag low prices, airlines make a calculation that they can sell some of these last minute seats at much higher profit margins (usually to a business traveler less concerned with the price).
What happened to airline pricing when COVID-19 hit?
COVID-19 essentially caused the airlines to have to chuck that practice out the window. Without booking data that could accurately forecast when people might buy flights, the airlines had to rely more on live data.
During the height of COVID-19, people canceled already-booked flights frequently and the historical data no longer could accurately predict anything. People stepped in to set pricing where the algorithms used to manage the process.
Airfare forecasting makes a comeback
Things are not quite back to business as usual. There is a shift underway, however. The airlines now see a slow return to more predictable forecasting because people are booking flights again, not being as restricted by COVID-19 concerns.
For the time being, this is mainly a domestic phenomenon. Much of the rest of the world is still in various states of restriction, and a lot of Americans are planning domestic flights but not returning to international travel patterns just yet.
The future of airfare pricing
The pandemic caused technology to accelerate in many areas of business, and the travel industry is no different. There’s long been a push to use dynamic pricing. This is the practice of using live data to tailor pricing in the moment for each individual search. To date, this has not caught on in any meaningful way.
Most experts expect that the airlines will come up with some sort of blended cocktail approach. What would this look like? You’ll see airlines using live data and historical data to serve up prices consumers will be willing to pay.
For now, airfare prices remain mostly more reasonable than usual. However, these rumblings lead us to think this might soon change. Travelers considering a summer vacation, your first post-pandemic trip, or a Thanksgiving / Christmas trip to see relatives you’ve been missing, we advise you to book sooner rather than later. Use the Annual Airfare Study to help guide your choices, and let us know if you have any questions in the comments below. It’s great we can finally wish you an enthusiastic Happy Travels once again!
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