Why airfares to US, Europe are going to get more expensive

Low glamour life

The simple fact is, the jet-setting business traveller knows just how glamorous it is (not) to hop on a flight or two each week. They’re not called road warriors for nothing. Many of them aren’t eager to jump back into that maelstrom after discovering a new more socially relaxed lifestyle over the past two years.

Like the multiple unknowns about COVID-19, we still have much to learn about the long term causes and effects of working from home. Predicting the future when the past isn’t over yet is a precarious task, but it does seem COVID-19 has provoked societal shifts that will reshape the long term in areas well beyond aviation. It’s undoubtedly changing the way we behave in the short term.

In addition to WFH there’s a conspiracy of forces at work to force a reshaping of the airline business model. Remote working, enhanced by new communication technology, and lifestyle changes are just more visible ones.

There’s plenty of other friction on business travel. First of all, companies are under growing pressure to reduce their carbon footprint. Travel, notably air travel, is a conspicuous item where obvious cuts can be made.

Long-haul flights, although a small proportion of the total, account for about 40 per cent of global aviation emissions, an easy target for reductions. And that tension on corporates to show their green credentials is mounting fast. Travellers, too, have kids who will give them a grilling on why they’re destroying the world.

Cost pressures are another powerful factor, after companies made massive savings on travel in the past two years. Instead of simply resetting the budget allocation to 2019 levels, zero budgeting becomes the order of the day. With alternatives available, every trip needs a new justification.

Expensive one day trips are an easy target, replaceable by quicker and cheaper online video connections. But during COVID-19, sales executives also discovered it was actually more efficient to make international online meeting calls to five different countries in one day instead of taking a week out of the office. It’s simply commercially more effective, as a new way of doing business.

The airlines’ reply “but there’s always going to be the need for face-to-face contacts and personal relationships.” Absolutely true – it’s just that there will be fewer of them; more will be set up remotely. It’s not a simple binary equation, travel-or-don’t-travel, but one of scale.

Then again, even though we prefer to look the other way, COVID-19 remains very much a fact of life. More Australians have died from it in recent months than in the previous two years (and new variants are making a rapid comeback in Europe and North America as winter approaches; even now 400 people are dying daily from COVID in the US). Corporates and business owners have a duty of care to their employees, and there’s still much uncertainty about insurance coverage and legal liabilities – not showstoppers in their own right, but another negative force.

Business travel is pivotal for airlines because it vitally underpins the business model of long-haul full service (higher cost) airlines. Basically it subsidises all those cheap fares in the back.

It used to contribute a half or even more of total revenue on these flights, even though business travellers only constitute about 12 per cent of passengers. The business traveller keeps on giving in predictable ways, unlike the once-a-year tourist. Most road warriors actually fly in the back of the bus, but they usually pay higher prices because they need to buy flexible fares, often at short notice. Some fly business or premium class, making their nomadic custom even more valuable.

Just reducing business travel by 20 per cent, in an industry that works on wafer-thin margins, is enough to push a long-haul flight into loss. But the reality is in most cases the decline is and will be much larger. Bill Gates reckoned it would drop 50 per cent. A major business travel organisation, GBTA, recently projected the 2019 level of global business travel spending won’t be reached until 2026 – another four years.

Dangerous to make tourist travellers pay

So what can airlines do to make up the revenue shortfall? As business travel is less price sensitive, fares can rise a bit to cover the shortfall, yet that can only achieve so much, when companies are looking to cut costs, with a lower dollar and slowing global economy.

Then, as most airlines with their nice new comfortable business class seats will say – with more bravado than confidence – there is the new emerging premium tourist who can be milked. True, but in no way will that be on the scale of business travel.

The last resort is to make tourists pay more. That’s a dangerous move. Tourists are much more price sensitive and they will either be deterred from travelling long haul at all, or will do so much less often. Either way the result is lower revenues.

That leaves limited options for the poor full service long-haul airline. Already many familiar brands, like Lufthansa and British Airways announced they will be permanently reducing the size of their operations. As a result we’ll see lower frequencies, especially on more marginal city pairs. Almost across the board, international flight frequencies are still steeply down on pre-pandemic levels. Reduced supply and less competition = higher fares.

It’s not all bad news for Australian tourists, though. This region is uniquely blessed with a whole legion of so-called long-haul low cost airlines, like Jetstar International, AirAsia X, Scoot, Cebu Pacific, Vietjet and so on.

These, mostly medium-haul operations, fly eight to 10 hours with models that don’t rely on business travellers. LCCs are high on seat density, low on frills. (But as always, competition counts; the six hour Sydney-Bali holiday on Jetstar will cost $1500 roundtrip, whereas the four hour Perth-Bali roundtrip prices at $500 – because AirAsia operates there as well as Jetstar.)

Meanwhile, tripping off to the US or Europe for your next holiday is going to be a whole lot more expensive if you want to keep working from home. At least, without all that commuting, you’ll have more time to dust off the camping gear and pack the car.

Peter Harbison is chairman emeritus of CAPA – Centre for Aviation.