The reason why airfares will remain high in 2023…and beyond

The price of airline tickets has continued to rise dramatically in 2022 for both cyclical and structural reasons. Should we expect the trend to reverse in 2023? Given the main cause of this increase there is little hope for improvement in the short to medium term.

An unquestionable increase in the price of airline tickets

If sometimes price increases are only a matter of perception, in the case of airline tickets it is a reality.

In France, according to the Direction Générale de l’Aviation Civile (DGAC) between October 2021 and October 2022 fares have increased by 15% on domestic flights and 26% on international flights.

This increase is 22.1% and 25.7% respectively if we refer to 2019, the pre-COVID period.

According to the US Bureau of Labor Statistics, airline ticket prices have increased by 42.9%.

A trend that tends to be confirmed: according to Amex Corporate Travel prices will increase by 25% in 2023 on the most important business routes.

What is the reason for this and will it last?

A strong increase in demand

The end of COVID restrictions in most countries (and now China) has resulted in a much higher than expected increase in demand. Some airports are already beyond their pre-COVID traffic and the others are not far from it. According to Eurocontrol, European traffic is already at 92% of its pre-COVID level.

An increase in demand logically means an increase in prices due to yield management. Logical? Not necessarily.

If demand remains even slightly lower than in 2019, there is no reason why there should not be the capacity to meet it.

So there are other reasons.

Less labor

As we have seen with the waves of cancellations in 2023, the airline industry is short of manpower.

Not only the airlines, some of which made massive layoffs during the COVID or pushed employees into retirement or out, but also all their airport service providers, without whom the planes could not fly either.

And as in the restaurant business, these jobs, often hard, see people turning away from them.

Less labor and more expensive labor means less flights and higher costs.

But that’s not all.

Rising fuel costs

Fuel represents 35% of the costs for a low cost airline and 18% for a normal airline.

As you may have noticed, the oil price has increased a lot in the last years.

But this 5-year view gives a biased perception. If we look 1 year back, it is much more nuanced.

Yes oil is expensive but not more than a year ago, it is even at its lowest. What is the reason why the prices do not go down?

First of all, there is the fuel hedging of the airlines, which explains why there is a time lag between the drop in fuel prices and the drop in ticket prices.

Then another factor comes into play.

The value of the dollar hurts the airlines of other countries

Jet fuel is purchased in dollars and a strong dollar creates a competitive disadvantage for airlines located outside the dollar zone.

Even though there has been an improvement in the last few weeks, it is clear that the euro has lost value against the dollar over the last 12 months and this can be felt when paying the bill.

This is even more striking if we look at the evolution of the last 5 years.

At the same oil price, airlines in the euro zone are now paying 18% more for fuel than when the euro was at its highest. So even if oil falls, the exchange rates erase part of this fall.

But if oil is on a downward trend and the euro is recovering, there is reason to hope for a return to normal? Well, no, and for a much more lasting reason than variations in the price of oil.

There are not enough aircrafts

As mentioned above, if demand remains below 2022, there is no reason for prices to spike. We have seen that the price of fuel explains, at least in part and temporarily, the increase in airfares, but there is one factor that will keep these prices high for a long time: the lack of aircrafts.

Without a sufficient number of aircrafts and regardless of the evolution of other costs, prices can only go up and the airlines will prioritize their allocation to the most profitable routes, thus feeding the phenomenon of price increases.

When the COVID-19 pandemic hit, airlines had to ground almost all their fleets. Some of them took advantage of the economic context (no one imagined such a takeover) and the environmental context (old aircrafts consume and pollute more than the latest generation) to remove some of them permanently from their fleet.

However, the recovery is stronger than expected and not only is there time to manufacture the aircraft, but manufacturers who fell behind on the production schedule during COVID already had to catch up.

So: fewer aircrafts and new aircrafts that will take a long time to be delivered = a lasting lack of capacity.

Sustainable because you only have to look at the backlog of Airbus and Boeing, the two main manufacturers.

Source : Defense & Security National

7,344 aircraft on order for Airbus, 5,996 for Boeing, for a total of 12,640 aircraft expected by the market.

Now let’s look at the production rate of the two manufacturers.

With 59 aircraft delivered in November 2022 by Airbus and 39 by Boeing, unless there is a major increase in production capacity, it will take 140 months, or more than 10 years, for everything to be delivered.

If you’re wondering if airfares will be dropping soon, here’s the answer.

The airlines are therefore starting to reactivate their old aircrafts: we can see, for example, that theA380 has not been abandoned by as many airlines as expectedLufthansa is reactivating its entire fleet of A340-600s, but this will be far from sufficient, especially since these aircraft are less fuel-efficient than the aircraft that will replace them in the future.

In the meantime they will logically have to arbitrate and will put their aircrafts on the most profitable routes (as we have seen with American Airlines which abandons its Miami Tel Aviv not because the route is not profitable but to put its aircraft on routes that are much more profitable). This will allow them to generate more revenue on the highly profitable routes and drive up the fare (lower capacity) on the others.

Bottom line

Two factors contribute to keeping airfares high: the price of fuel and the exchange rate of the dollar. But even if both were to decline significantly, a third, more structural factor prevents significant decreases in the medium term.

Now that the price of oil has reached less unreasonable levels and the euro is regaining some strength, we can expect the price of kerosene to fall in the near future. But as long as the airlines are unable to keep up with demand due to a lack of aircrafts, this will only have a marginal effect on ticket prices.

So without a collapse in demand there is no reason to see prices fall anytime soon.

Image : airfares by conejota via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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