If you have booked a flight over the past six months, you are likely to have been taken aback by the breathtaking increase in air fares. While the anecdotal evidence of a price hike is clear,there was a lack of publicly available data – until Qantas published its 2023 full-year results, which shine a light on what’s been happening to fares since Covid.
In the six months to June 2023, compared with pre-Covid levels, Qantas domestic fares have increased by 22.6%. Its international fares have increased by 52.2%, while Jetstar fares for both domestic and international flights have increased by 27.4% over the same time period. It’s safe to assume that these increases represent one of the most rapid price hikes in our lifetimes.
What makes these sky-high air fares worse is that they come at a time when we are dealing with an upsurge in interest rates, a rapidly rising general price level and moderate wage growth – all of which are quickly eroding the Australian consumer’s purchasing power.
Air fares have risen because of an imbalance between demand and supply. Aviation measures supply by examining the number of seats in the market; in the case of Australian domestic flights, over the six months to June 2023 there were still 6.5% fewer seats in the market than before Covid. We also know that the demand for domestic flying is stronger because of the flying that couldn’t take place during Covid. This means 6.5% fewer seats for double or triple the demand.
There is even greater imbalance between demand and supply playing out in overseas travel. The number of seats in the international Australian market currently remains around 30% below pre-Covid levels. Combined with international travel demand that has only just started to come into the market after the Covid lay off, this has generated a perfect storm.
The key to air fares returning to more normal levels is the return of seats to pre-Covid levels. In the case of domestic flights, the recovery began strongly in August 2021 through to April 2022, where 17% more seats were added to the market each month, reaching a point where the market seats were 93% of pre-Covid levels.
Since April 2022, however, the recovery has stagnated. In the case of the international aviation market, the recovery started later in October 2021 and has been at a more moderate pace of just 12.4% a month.
The slowing rate of recovery in airline seats is attributable to two factors: the first is the Russian invasion of Ukraine, which saw the price of jet fuel more than double, putting immense pressure on airline costs, which are passed on to fares.
The second is that airline profits have feasted on higher air fares – in fact, Qantas domestic and international profits in 2023 are at record levels and Jetstar profits are at near record levels. Why would management and shareholders want this to change? They have binged on the ecstasy of high air fares and slow seat growth, and it will be difficult to wean themselves off it.
There are three things that could change the status quo. The first is that the regulator is now watching higher Australian air fares and huge airline profits with great interest, particularly given the more dominant position that Qantas has in the Australian market. The second is that the Qantas brand name has taken an enormous hit. In response to that, don’t be surprised to see a series of sugar-hit lower price fares entering the market.
The third is that demand is starting to come out of the domestic market and will come out of the international market over the next six months, accelerated by higher interest rates and a cost of living crisis. This means we should start to see better domestic deals on air fares very shortly, and lower international air fares within six months.
Dr Tony Webber is the former chief economist of Qantas and has been an aviation consultant for more than a decade. He is currently managing director of Airline Intelligence and Research
