Why Airfares Cost So Much
Supply-side shortages and surging demands mean that your next holiday is going to cost more than you think.
Recently, the CEO of Lufthansa said that high yields (average airfares) “are just too much fun” and explained the airline would therefore hold off on adding more aircraft capacity. Emerging from the COVID era, Airlines are making bumper profits. If you have traveled recently, you surely would have noticed your contribution to those profits — tickets are NOT cheap.
Meanwhile, complaints about airlines are soaring higher than ever. Up nearly 270% from pre-pandemic levels. Passengers everywhere must deal with delays, cancellations, and lost luggage. But that has not cooled demand, up 67% Year-on-Year and back to 84% of the pre-covid level.
Growing demand and fewer flights have dramatically increased ticket prices, particularly for long-haul international flights. The cost of an economy seat in New Zealand is up 81% on the prior year. A ticket from the UK to South Africa is up 42%. On average, economy fares have increased by 36%.
A surge in demand within an environment of extreme supply-side constraints in the aviation industry has brought about these increases.
COVID and the Great Airline Shutdown
COVID hit the airline industry harder than most. Many airlines went bankrupt or needed to be bailed out by their taxpayers. The implications were an entire workforce being furloughed or laid off and vast amounts of inventory (planes) being stored away.
The pandemic resulted in the disappearance of 64 airline brands. Some went bankrupt, while others consolidated into larger groups. Examples of airlines that went bankrupt during this period include FlyBe (UK), Trans States Airlines (USA), Avianca (Columbia), and Virgin (Australia).
In the US alone, around 400,000 airline industry employees were fired, furloughed, or told they may lose their jobs. When people think about airline workers, they consider pilots and cabin crew. However, the airline industry also props up a bevy of workers in ground services, catering, maintenance, repair, and overhaul (MRO).
The evaporation of demand for flights during COVID also left airlines with planes that needed to be stored away. Over 16,000 aircraft were taken out of service during the pandemic. This equates to more than 60% of the world’s passenger fleet.
In essence, the airline industry shut itself down during COVID. The people critical to its operations were laid off or furloughed. The planes were packed away in storage. As the recovery from COVID started, Airlines needed to switch themselves back on, which has proved challenging.
Switching an Airline Back On is Hard
As travel demand has recovered post-COVID, airlines have had to rehire their workforce aggressively. This has proved to be quite difficult. On the surface, airlines have been able to re-hire. According to the Bureau of Transportation, passenger airline employment levels are only 0.6% below pre-COVID levels. However, airlines have been extremely vocal about the impact of staff shortages on the quality of their service.
When the pandemic hit, the airlines encouraged employees to retire early or take voluntary separation leave. This was particularly true for more senior staff. Now that the airlines are recovering, a hiring frenzy is taking place. However, most of these new hires are junior staff that lack the expertise and productivity of the people they are replacing.
The reality is that while airlines were pushing their staff away, other industries experienced generational hiring booms. The best people changed careers and it is now a challenge to lure them back. Some airlines are so desperate that they offer iPhones and free childcare to attract people.
Other Issues
In addition to the challenge of re-hiring their staff, airlines have been resistant to the economic and geopolitical issues facing most industries. Fuel prices have increased, partly concerning the Russian invasion of Ukraine. Meanwhile. the industry suffers from a shortage of parts needed to keep their planes in the air.
While fuel prices have been coming down over the last 12 months, a longer-term view shows that Jet Fuel Prices are still above 2019 levels:
Fuel prices represent 15% to 20% of all airline expenditures. Thus, the increase in fuel costs has had a direct flow-on impact on the airlines’ prices.
Airlines are also struggling to get enough planes flying in the air. Boeing and Airbus have a backlog of orders for almost 13,000 planes, which will take many years to fill. Supply chain issues are resulting in significant delays in manufacturing new planes. Airline leasing companies have reported six-month delays against plane contracts like the A321 Neo. These delays limit airlines’ capacity (flights) available for their customers.
It is also difficult and methodical to get planes locked away in storage ready to fly again. Regulators have stringent rules that require maintenance checks before returning an aircraft to service. Reactivating a plane for commercial service can take up to 1,000 hours.
Conclusion
The shortage of skilled and experienced labor is likely to be resolved slowly. Assuming the airlines cannot attract senior workers, they must wait for their junior staff to grow and develop. This will take time, during which issues due to labor constraints will persist. Likewise, the supply chain issues will need time to resolve and work through the wider global system.
In Europe, COVID acted as a consolidator of the airline industry. By taking many airlines off the table, the pandemic eliminated competition. Pre-2019, people could purchase airline tickets for less than it cost to get to the airport. This was due to intense competition between low-cost carriers. This travel segment has started disappearing and, as a result, is driving up prices for the consumer.
Airfare prices will likely remain expensive as long as these supply-side constraints endure. The assumption is also that demand will remain strong and grow towards pre-pandemic levels.
