Fares ‘sweet spot’ for airlines expected to end, IATA chief economist says

Istanbul: The chief economist of the global airline body says the “sweet spot” of passengers blindly accepting high fares may soon be over, as inflationary pressures in multiple sectors could dampen the appetite for travel.

The airline industry will share $US9.8 billion ($14.8 billion) in net profit this year, more than double the $US4.7 billion forecast in December, according to data analysed by the International Air Transport Association, which represents about 300 of the world’s biggest airlines. IATA expects some 4.35 billion passengers to travel in 2023, about 96 per cent of 2019 levels.

“I must admit we’ve been rather amazed at the low price sensitivity of [passengers] amid the demand for travel,” IATA’s chief economist Marie Owens Thomsen said at the body’s annual general meeting. “You would think this cannot last forever and that the sweet part of this sweet spot is likely to wane going forward. It’s likely to be more of an issue when nominal interest rates are rising and economic growth is slowing.”

But the head of the association, Willie Walsh, said data from its airline members shows the profit margin on global airfares for the first half of 2023 has remained flat in real terms when compared with the same period in 2019 due to increased costs, despite higher ticket prices.

Loading

Cirium data shows the average one-way, non-directionally averaged fare from the first quarter of this year was up 11 per cent, or $15, on the same period in 2019. The global average is well below the same average fare in Australia, which was up 26 per cent, or $34, on the same corresponding period in 2019.

Owens Thomsen also said passengers should brace for some of the cost of the industry’s sustainable transition to be offset through airfares, particularly if governments do not assist in the development and funding of sustainable aviation fuel.

Sustainable aviation fuel has been billeted by the industry as the only way to achieve carbon-neutral flying. Made from crops, household waste, animal fat and other biomass, it produces about one-fifth of the emissions of conventional jet fuel. But there’s only enough of the sustainable fuel being produced to replace less than 1 per cent of the world’s flying, and it’s three to four times the price of conventional jet fuel.

“Business 101 is covering your costs. Airlines will have to find a way of covering that cost, or they will start making losses again and that’s not in the interest of anybody because the rest of our value chain and the global economy is dependent on our ability to move passengers and goods around,” Owens Thomsen said.