Yahoo Finance Fly now before airfares soar, expert warns
As COVID travel restrictions have lifted, airlines have tried to tempt people back into the air with cheap flights.
However, one air travel expert thinks the rock-bottom deals will be short-lived.
University of Technology Sydney senior tourism lecturer David Beirman said rising fuel prices, largely driven by the conflict in Ukraine, would add to mounting pressure on airlines to hike ticket prices.
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Airlines don’t tend to feel rising oil prices straight away, which may explain why it currently costs more to drive two hours from Launceston to Hobart than it does to fly from Hobart to Melbourne.
Beirman said most airlines have hedged fuel arrangements, where they negotiate with an oil company to supply fuel at a set price for a predetermined period of time.
This protects airlines from the fluctuations in crude oil prices. However, when these contracts expire, he said airlines would have to renegotiate new contracts at a time when oil prices were soaring.
He said fuel prices made up 60 per cent of a budget carrier’s running costs and 40-45 per cent of running costs for full-service carriers such as Qantas and British Airways.
“So, when fuel makes up such a big part of the cost and the fuel has gone up higher, there's only one direction airfares can go,” Beirman said.
Selling cheap flights in bulk not a resilient business model
Rising fuel costs are not the only challenges facing airlines.
Beirman said carriers that survived COVID would also be under pressure to pay back their debts and future-proof their business models because government bailouts may not be available next time disaster strikes.
This could spell the end of the high-volume, low-yield business model that has led to cheap flights for consumers but razor-thin margins for airlines.
Airlines typically charge the lowest possible price they can to cover costs, working on the assumption that nearly all seats on a flight will be occupied.
For this model to work, airlines need full planes, which is why Beirman said airlines that were making fairly healthy profits pre-COVID “plummeted enormously” when passenger numbers dropped off.
“It’s going to take years for carriers to repay the losses that they've made over the last two years because of COVID,” he said.
As travel restrictions have lifted, airlines have reverted to their usual tactic of dirt cheap airfares, with Jetstar offering $22 fares on many domestic routes just a few weeks ago.
“But, realistically, you can expect that to last,” Beirman said.
“It’s just not a viable business proposition, particularly when airlines have got to make up for two years of crippling losses.”
He said airlines would likely need to rejig their business models so they were more resilient.
“The reality is [airlines] have got to make enough money so they don’t have to go to the government with a begging bowl every time there's a crisis,” Beirman said.
Beirman recommends snapping up low airfares now. “If you want to fly, fly now.”
He also added that although higher ticket prices were the logical way for airlines to go, “airlines don’t always act logically”.
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