What's next for air fares?

A sudden dip in average air fares this month is the beginning of the end of the party for consumers, rather than the dawn of a new era of price discounting.

Even though the May figures in the federal Bureau of Infrastructure Transport and Regional Economics domestic air fare indexes are the the lowest for three years, with both business and best discount fares dropping sharply, the truce that has been declared in the past week in the war between Virgin and Qantas suggest that, as the number of airline seats in the market stops growing, the average prices you’ll pay in coming months will increase as residual demand increases.

However, the factor that keeps demand for airline seats ticking over – the economy – is far from rosy with evidence of a slowdown now being widely reported.

That’s not helped by the federal government’s decision a fortnight ago to keep increasing taxes and spending, which is likely to have a depressing effect on consumer sentiment, with the airlines and the retail industries usually the first bellwethers of economic trends.

That means that, while restricting the supply of airline seats should force prices up, depressed demand caused by consumers deciding to keep their wallets in their pockets would force anxious airline managers to provide additional price incentives to fill seats that would otherwise fly empty.

Last week’s announcement by Qantas that it would stop piling on seating capacity to retain its 65 per cent market share, even though it has been popular with share market desk jockeys, hasn’t convinced market analysts and travel retailers that fares are going to rise.

As a result of changing market conditions, Qantas told the Australian Stock Exchange last week its total “domestic passenger growth (comprising Qantas Domestic, Qantas Link and Jetstar Domestic) will be zero in each of the first three months of financial year 2015 compared with the prior corresponding period”, when it had previously planned to increase the number of seats by 2.5 per cent, after hiking capacity by 3.5 per cent so far this year.

But the nation’s biggest travel retailer doesn’t see fares heading north.

"Airfare prices may well rise in the future, but I think it's premature to assume that this will automatically happen as a result of Qantas's announcement,” a Flight Centre spokesman told Fairfax Media. “Other factors will come into play, particularly the competitive landscape and, of course, customer demand at the time."

The other unknown is the response of Virgin Australia, which is refusing to signal its future intentions in its market share battle with Qantas, and especially the response of its budget subsidiary Tigerair.

Virgin Australia this morning reported advances in average fares paid (yield), overall traffic and average aircraft loadings (load factor) for April, compared with the same month last year, while its larger competitor suffered setbacks.

At the no frills end of the market, Tigerair continues rebounding from its 2011 grounding with passenger traffic up 21.2 per cent compared with the same month last year, seating capacity up 30.5 per cent and load factor of 82.6 per cent.

By contrast, Jetstar Domestic’s passenger traffic was up just 3.2 per cent, capacity up 7.6 per cent and load factor 77.1 per cent.

Tigerair this year brought two new A320 jets into its fleet and continues a controlled expansion on new routes and frequencies from Brisbane (to Darwin, Adelaide, Melbourne and Sydney), while it is about to abandon routes from Melbourne and Sydney to Alice Springs and from Melbourne to the Sunshine Coast to concentrate on new east coast frequencies, including two additional daily offpeak Sydney-Gold Coast flights.

Jetstar yesterday celebrated its tenth birthday since its first flight and plans to use the occasion to turn up the heat on its domestic budget rival.

At the other end of the market, the two big airline groups may have turned down the temperature in their battle for market dominance, but it is by no means over.

Virgin Australia continues its regional expansion to match Qantas’s reach in far-flung places across the country.

There’s no doubt that school holiday air fares in the next few months will reflect a tighter market with fewer discounts than in recent years. But while seats to the winter holiday sun will be at a premium, look for the usual rock-bottom pricing in the low-season period around October and November.

Are you planning on taking a domestic holiday in the next few months? Have you shelved a holiday because of tighter economic circumstances? Or will you be continuing with plans to holiday overseas? Leave a comment below.