After the two worst years since World War II, 2022 looks brighter for the global aviation industry. For passengers, the chance to travel at a low price can again prove to be short-lived.
By 2020, demand for international passengers was less than 25% of 2019, according to the International Air Transport Association. 2021 data are not yet available, but the hiccups in the Delta and Omicron variants make the association’s forecasts for 50% of the 2019 levels look optimistic.
With international and domestic routes reopening, airlines offer a range of special offers on airfare. These agreements are partly to lure unsafe travelers back and partly to compensate passengers for costs required to travel internationally, such as fees for COVID tests.
But do not expect the cheap prices to last.
They are likely to have a short lifespan as the industry grasps post-pandemic realities minus the state aid that enabled so many, contrary to predictions, to survive.
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Now comes an account as surviving airlines seek to return to viability, repair their debt-laden balances and future-proof their operations, with no guarantee that they will receive the same state aid when the next crisis hits.
What this could mean is abandoning the business model with thin profit margins that delivered ever cheaper airline tickets from the 1970s to the early 2020s.
Regulation and jumbo jet aircraft
Until the 1970s, the aviation industry was heavily regulated.
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 just two airlines – the state-owned Trans Australia Airlines and a private competitor (Ansett Airlines for the most part at the time).
Internationally, air fares were kept high by price cooperation through the International Air Transport Association (IATA), often described as a cartel. There were two fare levels – first class and economy.
Until 1970, the largest commercial jet was a Boeing 707, which could carry 180 passengers at a pinch. Air fares had to be high to cover the high operating costs (especially jet fuel). Most airlines accepted the IATA tariff levels. Discounts were rare.
Then in 1970, the Boeing 747 jumbo jet, which more than doubled the aircraft’s passenger capacity, came from 180 to 440.
This led to many changes in aviation operations and costs. Jumbo jet aircraft also enabled greater seat price flexibility with the introduction of business and premium economy classes.
Air fares plummet
When I started working as a travel consultant in 1981, the regulation of air fares had started to trickle out.
The official IATA economy return ticket from Sydney to London was around $ 3,500. But you could find prices with selected airlines for around 2,500 A $. (This was still several months’ salary for most, with the Australian average weekly full-time earnings in 1981 being A $ 311 for men and A $ 241 for women.)
In the 1980s and 1990s, travel agents began to establish themselves as “bucket shops” that specialized in offering discounts on airline tickets to fill empty seats at less popular airlines.
How Flight Center started. It opened its first storefront in Sydney in 1982, followed by stores in Melbourne and Brisbane. (It now has more than 650 stores in Australia and more than 550 in 10 other countries.)
Lower costs and falling air fares made IATA’s prices increasingly irrelevant. With the global rise in low-cost carriers, many of which were not IATA members, IATA finally abandoned the so-called “YY” ticket pricing in 2017.
Government regulation was also being phased out. Australia’s policy for two airlines ended in October 1990. Deregulation allowed more competitors and air fares were driven by the market rather than set by regulators.
In 2019, a return ticket between Sydney and London with a reputable airline could be purchased for around A $ 1,250, less than Australia’s average weekly full-time earnings for adults of A $ 1,658.
A return ticket Sydney-Perth, which cost around $ 1,100 in 1981, could be purchased in 2019 for less than $ 300.
Why the cheap ticket era may end
These price declines depended on the airlines embracing a business model based on lower profits per capita. customer, but flew with many more customers and reduced fixed costs by using larger capacity aircraft.
This business model contributed to the number of global tourists increasing from around 166 million in 1970 to 1.5 billion in 2019. But it also meant that airlines needed planes filled with passengers to make a profit. In 2019, the average profit margin before COVID per passengers on a long-haul international return flight around 10 USD.
It’s hard to see how races with knife-thin margins can continue to be the industry model.
Read more: The end of global travel as we know it: an opportunity for sustainable tourism
During 2022, it is likely that we will see consolidation in the industry as the airlines that survive seek to diversify into other businesses, such as catering or insurance.
Low cost carriers can still be viable, but only by convincing customers to pay for “affiliates” in addition to the seat, such as snacks on board the flight, extra luggage capacity or booking a rental car.
Although most airlines are required to limit price increases, it is inevitable that they have two years of massive losses to catch up and the continued extra cost of COVID-related rules to absorb.
Higher margins with lower passenger volume appear to be the more likely model.