Watchdog to monitor soaring cost of flights as airlines keep supply low

By Mark Saunokonoko, Senior Journalist, Dec 6, 2022

Australia's consumer watchdog has warnedairlinesthat the price of their domestic airfares will be monitored over the coming months after a new report showed the cost of flying has soared well above pre-pandemic levels.

The just-released ACCC report showed that the average revenue per passenger, an indication of average airfares across all fare types, was 27 per cent higher in October 2022 than in October 2019.

Qantas,Virgin AustraliaandRexhave all scaled back the supply of flights, which has resulted in a significant spike in prices. The three airline groups are all forecasting a profitable financial year after three years of significant losses.

ACCC Commissioner Anna Brakey said airfares had risen "due to strong demand for travel and constrained supply as airlines have scaled back their schedules" in response to high jet fuel costs and operational challenges.

Of the different fare types, the report noted discounted economy fares had increased the most, because of fewer flights but strong demand, and airlines not needing to offer special fares to fill planes.

An index of discounted economy fares across Australia's top 70 domestic routes in November was more than double its level in April, when it hit an 11-year low.

Brakey said "historic lows and highs" for discount airfares in the same year illustrated how changeable the market has been as the industry recovers from the pandemic.

"We accept that the airlines are still experiencing some pandemic-related resource challenges, but the ACCC will be monitoring them closely to ensure they return capacity to the market in a timely manner to start easing pressure on airfares," she said.

"We would be concerned if airlines withheld capacity to keep airfares high."

In a recent statement, Qantas Group said it would be operating at 95 per cent in the first half of next year, with the national carrier back to full capacity at some point in 2023.

Virgin Australia's domestic flights are understood to be nudging full capacity.

A spokesperson for the airline said the carrier was "working hard to service current levels of demand, with capacity on Virgin Australia's domestic network expected to reach around 100 per cent of pre-COVID levels in December and January."

Virgin said it had "every available aircraft in service" and planned to increase flights to popular holiday destinations during the holiday period.

9news.com.au has contacted Rex for comment.

The aviation sector was ravaged during the pandemic.

But after posting sizeable losses, airlines are forecasting positive financial returns on the back of strong demand and high airfares.

The Qantas Group, Virgin Australia and Rex all expect to be profitable in the current financial year ending June 2023.

The Qantas Group expects an underlying profit before tax of between $1.35 billion and $1.45 billion for the six months to the end of 2022, which is close to the company's record for a full year of operation.

Demand for travel is strong, which is putting the spotlight on flight supply.

Sydney Airport is gearing up for its busiest Christmas in three years with more than 2.2 million passengers predicted to pass through the terminals from December 12 to January 1.

The airport's domestic terminals will welcome more than 1.4 million passengers between December 12 and New Year's Day, a 91 per cent recovery on the same period in 2019.

Overseas travel is also steadily growing with over 800,000 passengers set to come through Sydney's international terminal during this period, representing a 71 per cent recovery on 2019 levels.

The ACCC report also found Jetstar, Qantas, Rex and Virgin Australia collectively cancelled 2.9 per cent of their domestic flights in October, down from 6.4 per cent in July and closer to the long-term average of 2.1 per cent.

Nearly 31 per cent of all flights were delayed in October, compared with the long-term average of about 18 per cent.

Qantas and Rex cancelled the lowest proportion of flights in October, and Qantas had the best on-time performance of the airlines.

(Source: https://www.9news.com.au/national/accc-to-watch-virgin-qantas-rex-airlines-as-cost-of-domestic-flights-soar-while-supply-is-low/29b9eac5-e634-41c1-a4bf-ab1de2bfe05e)

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(a) The article says that the airline industry is still recovering from the pandemic. Using the demand and supply model, explain the effects the pandemic had on the industry. (You do not need to draw a diagram.)(4marks)

(b) The article says that there is still strong demand for discounted economy airfares even though these fares have risen the most. What does this suggest about the price elasticity of demand (PED) for these fares, the slope of the demand curve for these fares and the impact on airline revenue?(3marks)