The Rise of Dynamic Pricing in the Skies: How AI is Transforming Airline Revenue and Leaving Travelers in the Clouds
The airline industry is experiencing a boom, with record revenue projections for 2024 reaching a staggering $996 billion. However, despite this seemingly robust financial picture, the reality for airlines is far less glamorous. Profit margins remain razor-thin, with an estimated $6.14 profit per passenger, about the price of a latte in New York City. This precarious situation is prompting airlines to turn towards a controversial technology: dynamic pricing.
Dynamic pricing, a technology that utilizes artificial intelligence (AI) to adjust fares and amenities in real-time based on a traveler’s willingness to pay, is rapidly gaining traction within the airline industry. While it offers the alluring promise of boosting revenue, its implementation comes with significant potential downsides for consumers and the industry itself.
A Surge in Dynamic Pricing Adoption
The appeal of dynamic pricing is clear for airlines. It allows them to maximize profits by adapting fares based on factors like demand, competition, and even individual passenger behavior. This means that the price you see for a flight can fluctuate wildly, even within a short timeframe.
The number of airlines employing some form of dynamic pricing has surged in recent years, with 258 carriers currently utilizing the technology, up from 220 in 2022. This trend is fueled by companies like Fetcherr, a startup founded in 2019, which provides the infrastructure for dynamic pricing systems.
Fetcherr leverages AI to analyze booking history, flight schedules, availability, and even weather and economic conditions to predict demand and generate optimal fares. "Our models are based on public data and our customer private data, all are stored on a private cloud for each of our customers," says Roy Cohen, Fetcherr’s CEO.
The Dark Side of Dynamic Pricing: A Traveler’s Nightmare
While the potential of dynamic pricing to boost airline profits is undeniable, its impact on consumers is less clear-cut.
For travelers, dynamic pricing can be a nightmare. Imagine needing to book a flight at peak times, only to see fares skyrocket due to limited availability. Forbes found that fares for a direct flight from NYC to Chicago, which might cost under $100 in the fall, can climb by five times or more in the days leading up to and after Thanksgiving under a dynamic pricing regime.
Dynamic pricing can also lead to a phenomenon called “implicit collusion,” where airlines, driven by their AI algorithms, constantly match each other’s price adjustments. This results in higher overall prices for consumers, as airlines that don’t utilize dynamic pricing have little incentive to lower fares.
The Ethical and Potential Limitations of Dynamic Pricing
Beyond its impact on individual travelers, dynamic pricing raises ethical concerns. Is it fair for the price of a flight to fluctuate based on an algorithm’s perception of a passenger’s willingness to pay? This raises questions about whether dynamic pricing exacerbates existing inequalities within the travel industry, disadvantaging those who are financially less fortunate or unable to plan ahead.
Moreover, dynamic pricing systems are not infallible. A study by Yale University found that systems that factor in competitor behavior could lead to airlines selling too many tickets too quickly, potentially impacting their revenue potential.
The Future of Dynamic Pricing: A Balancing Act
Despite these concerns, dynamic pricing is poised to become an integral part of the airline industry. Fetcherr, with its recent $90 million Series B funding round, is well-positioned to become a key player in this burgeoning market. The company is expanding its services to bundle and price multiple carrier services, and is looking to broaden its reach beyond the airline industry.
The future of dynamic pricing hinges on achieving a delicate balance. While airlines need to optimize revenue, consumers deserve fair and transparent pricing. Regulatory bodies are also keeping a watchful eye on the technology, with some countries possibly considering outlawing or restricting its use.
As AI continues to revolutionize the airline industry, dynamic pricing will undoubtedly continue to be a subject of debate. Ultimately, the success of dynamic pricing will depend on its ability to enhance the travel experience for both airlines and consumers while addressing the significant ethical and practical concerns that accompany its implementation.
