Why the era of cheap airline tickets could end

In 2020, international passenger demand was 25% lower than in 2019, according to the International Air Transport Association. Data for 2021 is not yet available, but the hiccups from the Delta and Omicron variants make the association’s forecast of 50% of 2019 levels optimistic.

With the reopening of international and domestic routes, airlines are offering a range of special airfare deals. These offers are intended in part to attract uncertain travelers and in part to compensate passengers for costs necessary to travel abroad, such as fees for COVID tests.

But don’t expect the cheap fares to last.

They will likely have a short lifespan as the industry faces post-pandemic realities without the government support that has allowed so many people to survive, contrary to expectations.

Now comes a math, as the surviving airlines seek to return to viability, mend their debt-laden balance sheets and sustain their operations, with no guarantees that they will get the same support from the government when the next crisis strikes.

This may mean abandoning the business model of extremely slim profit margins that allowed ever cheaper airline tickets to be offered from the 1970s through early 2020.

Regulators and large aircraft

Until the 1970s, the airline industry was highly regulated.

Nationally, this has often been done by governments to protect state-owned airlines. Australia’s “two-airline policy”, for example, restricted competition on major routes to just two airlines – the government-owned Trans Australia Airlines and a private competitor (mostly Ansett Airlines at the time) .

Internationally, air fares have been kept high through price cooperation through the International Air Transport Association (IATA), often described as a cartel. There were two levels of ticket pricing – first class and economy.

Until 1970, the largest commercial jet was a Boeing 707, which could accommodate 180 passengers in the blink of an eye. Airfares had to be high to cover the high cost of operations (especially jet fuel). Most airlines accepted IATA fares. The discount was rare.

Then in 1970 came the Boeing 747 jumbo jet, which more than doubled the passenger capacity of flights from 180 to 440.

This has resulted in many changes in aviation operations and costs. Large aircraft have also allowed greater flexibility in seat pricing, with the introduction of premium business and economy classes.

Air fares are collapsing

When I started working as a travel consultant in 1981, the regulation of air fares was starting to crumble.

The official IATA economy round-trip fare from Sydney to London was approximately AU $ 3,500. But you can find fares on some airlines for around A $ 2,500. (This was still several months’ wages for the most part, with the average full-time weekly earnings in Australia in 1981 being A $ 311 for women. men and AU $ 241 for women.)

In the 1980s and 1990s, travel agents began to establish themselves as “travel shops” specializing in offering discounted airfares to fill empty seats on less popular airlines.

This is how Flight Center began. It opened its first storefront in Sydney in 1982, followed by stores in Melbourne and Brisbane. (It now has over 650 stores in Australia and over 550 in 10 other countries.)

Falling costs and falling air fares have made IATA’s fares less and less relevant. With the global rise of low-cost airlines, many of which were not members of IATA, IATA finally abandoned so-called “YY” pricing in 2017.

Government regulation was also taking place. The Australian policy of the two airlines ended in October 1990. Deregulation allowed more competitors, and air fares were determined by the market rather than set by regulators.

By 2019, a round-trip ticket from Sydney to London on a reputable airline could be purchased for around A $ 1,250, less than the average weekly salary of a full-time adult in Australia, which is $ 1. 658 Australian dollars.

A Sydney-Perth round trip that cost around A $ 1,100 in 1981 could be purchased in 2019 for less than A $ 300.

Why the era of cheap fares could end

These price cuts depended on airlines adopting a business model based on lower profits per customer but carrying many more customers, reducing fixed overhead costs by using larger capacity planes.

This business model helped increase the number of global tourists from around 166 million in 1970 to 1.5 billion in 2019. But it also meant that airlines needed planes packed with passengers to turn a profit. In 2019, the average pre-COVID profit margin per passenger on a long-haul international round-trip flight was around US $ 10.

It’s hard to see how operating on very thin margins can continue to be the industry model.

During 2022, it is likely that we will see consolidation within the industry as the surviving airlines seek to branch out into other businesses, such as foodservice or insurance.

Low-cost carriers can still be viable, but only by convincing customers to pay for “extras” beyond the airline seat, such as in-flight snacks, extra baggage capacity, or booking a flight. a rental car.

While most airlines have pledged to limit price increases, it is clear that they have two years of massive losses to make up for and the continued overhead of COVID-related regulations to absorb.

Higher margins with lower passenger volumes seem to be the most likely model. (the conversation)

By David Beirman, Sydney University of Technology

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