Sky isn’t the limit on airline prices
Airlines invite you to fly this year’s costly skies.
Well, not exactly.
While airlines are grateful for your business after their pandemic-era shutdown, they lack sufficient planes, trained staff, and airtraffic controllers to carry the record number of people determined to fly this year.
Global air traffic in 2023 is expected to eclipse the record set in 2019, the last pre-pandemic year, when the industry had far more employees than now.
The result is fewer flight choices and cramped conditions on those planes that are available.
And it has caused one of the biggest industry-wide fare hikes in history. Most domestic fares are up only modestly, but international fares have jumped as much as 50 per cent from last year.
Airlines are taking advantage of the demand-supply imbalance to boost prices.
Some industry leaders are revelling in the industry’s comeback after Air Canada, for one, racked up about $9 billion in pandemic-era losses.
The CEO of Lufthansa AG, Carsten Spohr, told financial analysts that Germany’s flagship carrier is in no rush to add more planes. The higher fares that result from limited flight availability “are just too much fun,” he said.
Air Canada’s restored profitability is evident in its latest quarterly results.
AC’s revenue per available seat mile surged by 39 per cent in that quarter over the same period a year earlier.
But its costs per available seat mile increased by just 2.5 per cent.
Strong demand and lower-thanexpected fuel costs prompted AC last month to revise upward its forecast for EBITDA, or earnings before interest, taxes, depreciation, and amortization.
Air Canada “is capitalizing on very solid near-term demand trends that is allowing the company to raise prices in excess of rising costs,” says Walter Spracklin, a Royal Bank of Canada analyst.
Mind you, many airline analysts warn that the current industry exuberance will be short-lived.
They expect persistent high interest rates and a recession later in the year to cool the ardour of travellers.
And there are other factors besides profit enhancement to account for today’s high fares.
■ Booming demand. Airlines are coping with pent-up demand from people who crave “experiences” after pandemic spending mostly on goods rather than services.
Favourite travel destinations, notably in Europe, have lifted the last of their COVID restrictions, including proof of vaccination requirements.
And business-class air travel, in contrast to leisure travel, hasn’t fully recovered. When it does, the industry’s limited capacity will be further strained.
■ Labour shortages. Tens of thousands of North American air-travel workers left the industry during the pandemic.
Last year, only 238 people in Canada earned their commercial pilot’s licenses, down 79 per cent from the 2019 level.
Air Canada and WestJet are competing for the limited supply of pilots and other staff with Flair Airlines, Lynx Air, and other discount airlines.
There is also a shortage of airtraffic controllers, which has forced major airlines to cut North American flights by about 10 per cent at the busiest airports.
■ Higher labour costs. Pilots at WestJet recently negotiated a new contract that pays them a 24 per cent wage increase over four years.
Their AC counterparts are looking for parity with the new WestJet deal. They will open negotiations soon, a year ahead of their current contract’s expiration. They want to use today’s record traffic levels as leverage in bargaining.
■ Aircraft and parts shortages. Boeing Co. has twice delayed promised deliveries of its energy-efficient 737 Max, a workhorse in the fleets of Air Canada and WestJet.
Both Boeing and its archrival Airbus SE are struggling with supplychain bottlenecks.
Dave Calhoun, CEO of Boeing, has warned that production of airplanes and spare parts will continue to be slow “for a very long time.”
Those hardships for the industry and its customers will ease over the next two years.
Global air traffic will climb to an annual eight billion passengers by 2050, says the International Air Transport Association (IATA), the trade group for the world’s commercial airlines.
IATA expects there will be sufficient capacity to accommodate that near doubling in traffic from 2019 levels.
But climate change might put an end to the pre-pandemic era of cheap flights.
So far, Europe is in the lead in legislating carbon neutrality in the skies.
To meet Europe’s governmentmandated emissions-reduction targets by 2050, commercial airlines, which account for about 2.5 per cent of global CO2 emissions, will have to eventually replace their fleets with more energy efficient aircraft and ultimately electric planes when that technology is perfected.
The European airline industry claims that the transition will cost it about $1.2 trillion over the next two and a half decades.
Hard as it is to believe, someday today’s high airfares might seem like a bargain.