From the publisher March 2017

Bruce Piper

How low can they go? Much has been made in recent months of the bargain international airfares currently available, as carriers continue to pile on capacity into the Australian market. Every week it seems there’s a new sale, and while consumers are clearly the winners, some in the industry are warning that the clearly unsustainable and irrational pricing behaviour must surely lead to a correction.

Last month a number of agents contacted me about a Xiamen Airlines economy class fare from Sydney/Melbourne to China, where the nett price was just $8 return. That’s not a typo — the carrier was charging just $8 to take someone to China and back. Of course there was a fuel surcharge which more than doubled the fare to a whopping $18.60 — and then those pesky Passenger Movement Charges and airport fees which boosted the price to a total of $434. Return from Australia to China! And that wasn’t just to a Xiamen Airlines long-haul port — the fare included domestic add-ons taking passengers to 23 different ports within China.

That’s just one example, but there are plenty of others. China Eastern last month took the unprecedented step of offering a “buy one get one free” fare for Australian passengers — and not just to China but right across its network to North America and Europe. Business class fares to North and South America are now regularly offered for not much more than $4,000, and one agent highlighted a British Airways economy fare from London Heathrow to Sydney which cost his client just 203. When you consider that travel agents are trying to earn a living from the small commission payable on these fares it is clear that there’s just not enough money in it to pay for a cup of coffee, let alone run a business.

The minuscule margins in dollar terms mean analysts are well advised to give little credence to TTV figures. Travel businesses which have large turnovers sometimes tout their overall revenue as an indicator of increasing market share and business activity — but there’s no point in having a large TTV if you’re effectively losing money on every transaction. The same goes for airlines — they have lots of seats to fill, but at prices like these the yields must be practically non-existent. And amidst all that capacity continues to grow — for example, Singapore Airlines plans to boost its Sydney frequencies to five daily in the coming months!

As they say in the classics, “something’s got to give”. Losing money on every ticket is not a sustainable way to run a business. Let’s hope that things start to come down to earth soon — with a soft landing rather than a crash.

 

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