The party's over as dollar, fuel crimp the good times

Business travellers and frequent fliers will bear the brunt of fare and surcharge increases triggered by the fall in the value of the Australian dollar, but holiday travellers will also find that cheap fares will be harder to find in the next year.

The tightening up of discounts and the increase in fares will affect both domestic and international markets following action by both the Qantas and Virgin groups in the past fortnight.

Virgin Australia announced last week it would raise fares across its network by an average of three per cent and increase fuel surcharges on international flights, blaming the weaker Australian dollar for making jet fuel more expensive.

Virgin will increase the base fares by $25 on a one-way economy ticket to the US, Europe and the Middle East. A one-way long-haul international flight will rise by $35 for premium economy seat.

The airline will raise the fare for a business class seat for a flight to the US by $50, and by $65 to Europe.

Fares to New Zealand and Asian destinations like Bali and Phuket will increase by three per cent – although leisure travellers will continue to receive the best discount, which rises and falls according to demand and seasonality.

Most of the extra will be paid by companies moving their people around on business and full economy fares.

A number of factors are driving the changing landscape:

  • Both domestic airlines have engaged in a ferocious fare war in the past 12 months, as a result of which both are bleeding cash, which they can no longer afford to do.
  • Their fuel bill – their biggest single expense – is climbing; there is no other factor in play with such control over the destiny of airlines.
  • Many international airlines incurring most of their bills in US dollars are under pressure to cut back the number of seats they're flying into Australian as maintaining fares in Australian dollars, compared with six months ago, now means cutting the prices they are charging.
  • The non-mining local economy is still tanking with high unemployment and underemployment no longer reflected in official figures. Although there is relief from mortgage pressures through falling interest rates, people are more inclined to keep discretionary income otherwise spent on items like travel in the bank when the jobs outlook is shaky.
  • When the going gets tough, full-service airlines that rely on a strong economy like Qantas and the reinvented Virgin Australia have to pull their heads in, but low-cost carriers like Jetstar, Tigerair and AirAsia X come into their own, displacing the market share of the full-service carriers.

Subjects like these were the centre of attention in Sydney last week at an airline industry talkfest put together by the Centre for Asia Pacific Aviation.

CAPA executive chairman Peter Harbison told the conference low-cost carriers would dominate long-haul travel in Asia by the end of the decade.

Mr Harbison said by the end of this year AirAsia X would be the fourth largest foreign airline in Australia.

The carrier flies from Sydney, Melbourne, the Gold Coast and Perth to its Kuala Lumpur hub in Malaysia and will shortly start four flights a week to Adelaide.

AAX feeds traffic into the short-haul network of its step-sister AirAsia, which, apart from Malaysia, has satellite subsidiaries in Thailand and Indonesia.

AirAsia X CEO Azran Osman-Rani told the conference his airline was planning to double the frequency of its flights to and from Australia by next year.

"Australia is a third of our business," he said. That's an eerie number as it's also the proportion of the global flying network of Emirates, of Dubai, which is effectively a low-cost carrier that offers full-service frills. With the domination of the local industry by the high-cost Qantas, Australia has been easy pickings for Emirates, especially since successive Australian governments have allowed ultra-liberal access by foreign carriers.

Domestically, although Virgin wants its new subsidiary Tigerair to be making money within two years, Tiger plans to remain the price leader while doubling its fleet in the next five years.

Jetstar has vowed to defend its turf. It says there is plenty of room for growth at the budget end of the market and it will be offering "sustainable low fares" – although "sustainable" in that context is code for "cheap, but not stupid cheap".

Have you put off travel because of the state of the economy or because of your personal job circumstances? Are you still planning to travel in the net year? Have you replaced international travel with domestic travel to save money?