Price gauging or sustainability: What’s really behind record airfares in 2023?

Sydney, Australia - March 4, 2013: People working on a number of airplanes on the tarmac at Sydney's Kingsford Smith Airport, with the city's skyline in the background.

As soon as governments around the world lifted border closures at the end of the COVID pandemic, debate has been rife surrounding airlines and their seemingly exorbitant price points, but what are the key factors behind the high prices?

Come 2023, many airlines have posted record profit margins. Qantas, for example, recently announced it expects its FY23 underlying profit before tax to hit between $2.425 and $2.475b, while new data from Kayak highlighted the average return airfare in economy from Australia is now, on average 50 per cent higher, only adding fuel to the consumer’s fire.

But is there more to it than airlines trying to gauge the public?

Professor Dr. Rico Merkert, the deputy director of transport studies and professor of supply chain management at the University of Sydney business school said, “there are a lot of things that have happened since then (2019).”

Professor Dr Rico Merkert. Image Source: Sydney University

“One of the things to account for is inflation, so in reality that 50 per cent needs to be adjusted for that, but you are still looking at something around 40 per cent, which is substantial.”

“I think the main factor of the increase was related to simple economics and supply and demand.”

“After the GFC airlines added a lot of capacity very quickly”.

“This time they have shown capacity discipline. Both Australian airlines, like Qantas and Virgin, but also international airlines that haven’t been pushing back into Australia as aggressively as they did in the past. So that meant the capacity offered to the market was quite low compared to what we saw pre-COVID-19.”

“When you combine that with the pent-up demand that we saw, that’s the perfect recipe for more demand than supply, the airlines realised that and increased their fares, and it worked. Yields went up and as a result, profitability went up.”

“Having said that, those airfares have come down somewhat, not in all sectors but they have come down since the beginning of the year and I do think that will continue.”

Asked whether airlines are price gauging, or still recouping their losses from the COVID period, Merkert said, “I think it’s a bit of both.”

“Obviously they had to urgently repair their balance sheets, but if someone said I am willing to pay $5000 for a ticket, why wouldn’t you accept that?”

Modern-day carriers also have another major issue to tackle, sustainability, and there has never been more pressure to make change.

SAF fuelling an Emirates flight. (Supplied)

Many are moving towards a blend of traditional jet fuels and sustainable aviation fuel (SAF), which is more expensive than the former, in turn playing a role in the high fares.

Qantas is currently in the process of a complete overhaul of its fleet, fare welling its 717’s to make way for new, more fuel efficient Airbus A220 models, of which the airline will see the delivery of a new aircraft every three weeks on average.

The new aircraft will play a vital role in the national carriers success in achieving its net zero targets, the new planes automatically emit 30 per cent less fuel, therefore reducing their carbon footprint by 30 per cent.

“The carriers, especially Qantas also need to get as much cash as possible whilst they can before we get into a potential recession,” Merkert, said.

Because they will need that cash in the not so distant future to pay for all the new aircraft they are getting.

There is light at the end of the tunnel according to Merkert, who believes coming months will see a balancing of fares as competition between airlines in Australia continues to develop.

“With more airlines coming back into Australia, particularly low cost carriers like Vietjet and Bamboo and Qatar is asking for more flights into Australia, as those international carriers continue to come back online, I think the airfares are going to come down in the next two to three months,” he said.

Competition the major issue for domestic travel

Domestic airlines have largely returned to normality, the same Kayak data that pointed out the international increases showed intranational flights are only around 10 per cent up on pre pandemic rates.

The big issue in this market is the so called ‘duopoly’ – highlighted in the ACCC’s final monitoring report -shared by Qantas and Virgin. The two carriers took up around 94 per cent of the domestic market in April this year.

The report also criticised Sydney Airport’s demand management system which controls the distribution of take off and landing slots.

The scheme has been accused of fostering the duopoly and nudging out Rex and Bonza from Sydney Airport, of which the later is still unable to secure a position at Sydney Airport.

“I’m baffled by some of the commentary because the domestic market has never had as many competitors as it has today,” Outgoing Qantas CEO, Alan Joyce told a Conexus Financial conference on Tuesday.

“Here there are [no ownership barriers] and we have more competitors in the domestic market than we’ve ever had before.”

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