Why the era of cheap flight tickets may end

According to the International Air Transport Association, international passenger demand in 2020 was less than 25% compared to 2019. The 2021 data is not yet available, but the hiccups of the Delta and Omicron variants make the association forecast of 50% of 2019 levels optimistic.

With international and domestic routes reopening, airlines are offering a number of special deals on airfares. These deals are partly to lure back unsure travelers and partly to offset the costs required by travelers to travel internationally, such as fees for COVID tests.

But don’t expect cheap fares to run.

They are likely to have a brief lifespan, as the industry comes to grips with the realities of the post-pandemic, minus the government support that enabled so many people, contrary to predictions, to survive.

Now comes a reckoning, as surviving airlines try to return to viability, repair their debt-laden balance sheets and future-proof their operations, without any guarantees they’ll get the same government support when the next crisis strikes. .

That could mean abandoning the business model of wafer-thin profit margins, which gave ever cheaper airfare from the 1970s to the early 2020s.

regulation and jumbo jets

The airline industry was highly regulated until the 1970s.

Domestically, this was often done by governments to protect state-owned airlines. Australia’s “two-airline policy”, for example, limited competition on major routes to only two airlines – the government-owned Trans Australia Airlines and one private competitor (Ansett Airlines for the time being).

Internationally, airfares were kept high by price cooperation through the International Air Transport Association (IATA), often described as a cartel. There were two ticket pricing tiers – First Class and Economy.

By 1970 the largest commercial jet aircraft was the Boeing 707, which could accommodate 180 passengers at a time. Airfares have to be higher to cover the higher cost of operation (especially jet fuel). Most airlines accept IATA fare levels. Discounts were rare.

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

This led to many changes in aviation operations and costs. Jumbo jets also enabled seat-pricing flexibility with the introduction of business and premium economy classes.

drop in airfares

When I started working as a travel consultant in 1981, the regulation of airfares was opening up.

The official IATA economy return fare from Sydney to London was approximately $3,500. But you can find fares on select airlines for around $2,500. (This was still several months’ pay for most, with Australian average weekly full-time earnings in 1981 of A$311 for men and A$241 for women.)

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

This is how the flight center started. It opened its first shopfront in Sydney in 1982, followed by stores in Melbourne and Brisbane. (It now has over 650 shops in Australia, and over 550 in 10 other countries.)

Lower costs and declining airfares have made IATA fares more irrelevant. With the global growth of low-cost carriers, many of which were not IATA members, IATA finally dropped the so-called “YY” fare-fixing in 2017.

Government regulation was also reluctant. Australia’s two-airline policy expired in October 1990. Regulation allowed more competitors, and airfares were market-driven, rather than set by regulatory bodies.

As of 2019, return fares between Sydney and London on a reputable airline can be purchased for around A$1,250, which is less than Australia’s average full-time adult average weekly income of A$1,658.

Sydney-Perth return fares that cost A$1,100 in 1981 can be purchased for less than A$300 in 2019.

Why the era of cheap rent may end

These price drops depend on airlines adopting a business model based on low profits per customer but fly a lot more customers, using larger-capacity aircraft to cut fixed overheads.

This business model contributed to the number of global tourists that grew from about 166 million in 1970 to 1.5 billion in 2019. But it also meant that airlines needed planes full of passengers to make a profit. The average pre-COVID profit margin per passenger on long-haul international return flight was around US$10 as of 2019.

It’s hard to see how running on razor-thin margins can keep up with the industry model.

During 2022 it is likely that we will see consolidation within the industry, with airlines looking to diversify into other businesses, such as catering or insurance.

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

While most airlines are committed to limiting price hikes, there is no escaping the fact that they have suffered huge losses for two years and have to absorb the continuing additional cost of COVID-related regulations.

Higher margins with lower passenger numbers seems to be the more likely model. (Conversation)

By David Birman, University of Technology Sydney