Why COVID-19 may signal the end of the age of ever-cheaper air travel

Airlines are providing a variety of special bargains on airfares when international and local routes resume. These packages are intended to tempt hesitant travelers while also compensating customers for expenditures associated with overseas travel, such as COVID test fees.

However, don’t expect the low fares to persist.

They are likely to have a short existence as the business adjusts to the post-pandemic reality without the government assistance that allowed so many people to live, contrary to projections.

Now comes the reckoning, as surviving airlines strive to regain viability, fix their debt-laden balance sheets, and future-proof their operations, with no assurance that they will get the same government assistance when the next crisis strikes.

This might imply abandoning the business strategy of razor-thin profit margins that resulted in ever-lower airfares from the 1970s until the beginning of 2020.

Jumbo jets and regulations

Domestically, governments often did this to preserve state-owned airlines. For example, Australia’s “two-airline policy” limited competition on important routes to just two airlines — the government-owned Trans Australia Airlines and a private rival (Ansett Airlines for most of that time).

Internationally, airfares were maintained high through pricing coordination via the International Air Transport Association (IATA), which was sometimes referred to as a cartel. There were two ticket types: first-class and economy.

Until 1970, the largest commercial jet aircraft was the Boeing 707, which could fit 180 people in a pinch. To fund the high expense of operations, airfares have to be high (especially jet fuel). The IATA tariff levels were accepted by the majority of carriers. Discounting was uncommon.

Why may the low-cost era be coming to an end?
These pricing reductions were contingent on airlines adopting a business strategy based on lower earnings per customer but flying a lot more passengers while reducing fixed overheads by employing larger-capacity aircraft.

This business approach helped to increase the number of worldwide visitors from over 166 million in 1970 to 1.5 billion. However, it also meant that airlines needed flights full of people in order to earn a profit. The average pre-COVID profit margin per passenger on a long-haul international return trip in 2019 was about US$10.

It’s difficult to see how the industrial model of operating on razor-thin margins can be sustained.

It is anticipated that the sector will consolidate in 2022, with the airlines that survive aiming to expand into other areas such as catering or insurance.

Low-cost airlines may still be feasible, but only if they can persuade passengers to pay for “ancillaries” other than the airline seat, such as in-flight refreshments, more baggage capacity, or arranging a rental vehicle.

Although most airlines are dedicated to keeping price hikes to a minimum, there is no getting around the reality that they have two years of enormous losses to make up for, as well as the ongoing additional cost of COVID-related restrictions to bear.

Higher margins with reduced passenger numbers seem to be the more likely paradigm.

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