Australian international air fares have surged by more than 50% above pre-pandemic levels, new data shows, even as the cost of jet fuel plunges, creating a tailwind for airline profits and source of frustration for travellers.
Analysts link the apparent discrepancy between high fares and falling costs to profit maximisation, with airlines including Australia’s national carrier Qantas, in no hurry to give up the extra income.
Data from flight search company Kayak shows the average return economy international fare from Australia is now $1,827, compared with $1,213 in 2019. The most popular routes include flights to London, Bali, Tokyo, Paris and Los Angeles, according to analysis conducted for Guardian Australia.
Average domestic ticket prices are up a more modest 10% over the same period.
Tony Webber, an aviation analyst and former chief economist at Qantas, said that air fares were only indirectly driven by an airline’s operating costs, with pricing primarily driven by customer demand and capacity.
“Airlines have still not returned to flying internationally at their pre-Covid capacities, and they’re aware of how strong demand is,” Webber said.
“They’re recovering capacity and bringing down air fares, but they’re doing it passively and slowly because they know they’re making money.”
Airlines around the world have been profiting from the circumstances. The owner of British Airways has just upgraded its financial outlook due to strong demand for holiday travel, while US-based Delta Air Lines is also enjoying a return to profitability.
But few have enjoyed as strong a rebound as Australia’s largest carrier.
After losing more than $7bn during the pandemic, partially offset by government payments, Qantas’s financial performance has surged, with the airline now on track to rake in a record net profit of up to $2.48bn this financial year.
This is almost $1bn higher than its prior record in 2018, representing a huge gain in an industry that typically operates on tight margins.
The link between aviation fuel and ticket prices has long been a contentious issue, with airlines typically raising prices promptly when oil costs increase, but acting with less haste when the reverse occurs.
“It’s a perfectly rational business decision for the airlines, especially those who lost money during the pandemic,” said Webber.
“You can’t just look at one year and say it’s price gouging, you’ve got to look at it over five or 10 years, because airlines will try and make money while the sun shines because they know it won’t last for ever.”
Fuel accounts for around one-quarter of Qantas’s costs, according to the airline’s public disclosures, which is a significant expense that rivals staffing costs.
Analysts note that airlines have hedging strategies to smooth volatile aviation fuel prices, which peaked last year amid supply chain disruptions caused by the Russian invasion of Ukraine. This means the associated rises and falls in fuel prices can take some months to flow through to an airline.
During the period of high aviation fuel prices last year, Qantas chief executive, Alan Joyce, said international fares would need to rise by 20%, and domestic flights by 10%, to cover costs.
However, fuel prices have halved since mid-2022 peaks, according to data from the International Air Transport Association. Aviation fuel is now priced near levels at which many airlines operated very profitably in during 2018.
While Joyce has acknowledged some cost reductions, the airline has given cloaked insight into its pricing, noting only that there is downward pressure on fares, without quantifying any changes.
In response to questions, Qantas pointed to a market update last week that noted fares were moderating.
Qantas told investors that improvements in aviation supply chains were combining with lower fuel prices to put “downward pressure on fares”.
A Qantas investor briefing on Tuesday was centred on how to maintain and unlock margins on its domestic and international routes, including a focus on managing costs.
The airline’s dramatic return to profitability has not impressed everyone.
The Transport Workers’ Union has described Qantas’ forecast profit as “obscene”, especially after it received generous government pandemic payments and was found to have illegally outsourced 1,700 ground handler jobs according to a court decision the airline is appealing.
High air fares and strong profits at airlines also rub against the financial pressures faced by households, weighed down by rising rents, mortgages and inflation-fuelled food and electricity costs.
International holiday travel is a component of inflation calculations, which means strong demand and high fares are helping keep levels elevated, even though they are not as big of an inflation concern as food or rent.
Analysts expect international fares to stay high until pent-up demand from travellers eases and seat capacity increases. The competition watchdog has previously warned airlines not to hold back additional capacity to keep fares high.
“I expect prices to start trending down over the second half of this year and possibly even reaching close to pre-pandemic levels in about 18 to 24 months’ time,” said Nick Schroeder, an industry analyst at IBISWorld.
“Airlines have been slow to restore capacity on particular international routes, so they’ve been able to charge higher prices.
“I’m sure they don’t want to drop air fares in line with fuel prices because they’ve got a lot of other factors to consider including retrieving profits from all their losses during the pandemic.”
