Slow growth hits airlines

Slow growth hits airlines

Cutting airfare to boost revenue not always the answer

People check the status of their flights at Suvarnabhumi airport. Airlines are competing for customers during the holidays by lowering ticket prices.
People check the status of their flights at Suvarnabhumi airport. Airlines are competing for customers during the holidays by lowering ticket prices.

Most people would be all too willing to open their wallets for cheap flight tickets. But dumping ticket prices to stay ahead of the competition could cause more harm than good on airlines if they are not careful.

The past few years have not been kind to commercial airlines thanks to the ongoing US-China trade war and the global economy still reeling from a slowdown.

The cost pressures have weighed solidly on many airlines which must win more customers to offset rising financial constraints.

The price war has almost been an instinctive response as competition heats up despite the fact that the squeeze is being felt in the airlines' balance sheets.

However, the issue is not so simple as fare competition can be constructive for airlines if it is carefully designed and formulated. However, if not, the race to offer lower fares could intensify into price wars which could see airlines slide into dangerous territory, according to a Bangkok-based aviation expert.

The fare competition could mean reduced profit margins unless an airline is able to exceed its targets in filling seats on a given flight.

That said, the load factor has to be maintained at a high rate, which is tough given intense competition across the industry. The factor requires the percentage of available seating capacity to be regularly filled by passengers.

There is a limit to how low the fares can go even for low-cost carriers which allocate a limited number of seats sold at "ultra-cheap prices" on each flight.

For full-service airlines, the prices can only be lowered over a specific period of time and a review is made every one or two months, as can be seen from the Singapore Airlines pricing strategy in a recent online sale.

Singapore Airlines is one of the world's leading carriers which has kept its economy-class fares to popular destinations such as those in Japan and Europe low.

The airline offers regular price updates although the lowest fares come attached with certain conditions including no cancellation or refunds and the imposition of a no-show fee and itinerary change charge.

The expert said the trend for next year are fares that point towards a general hike.

Cost pressures lower

A report by the International Air Transport Association (IATA) this month says cost pressures have fallen on the back of softer fuel prices but balancing slow revenue growth will be a challenge.

Consumers benefit from lower travel costs and more routes leading to them spending an equivalent of 1% of world GDP on air transport in 2020.

According to the IATA, consumers will see a substantial increase in the value they derive from air transport in 2020 including stability in what they pay airlines, after allowing for inflation.

The average return fare (before surcharges and tax) of US$293 (8,800 baht) in 2020 is forecast to be 64% lower than in 1998, after adjusting for inflation.

The number of new destinations is forecast to rise also, with trip frequencies up too; both boosting consumer benefits.

The IATA expected 1% of world GDP to be spent on air transport in 2020, totalling $908 billion while world trade is expected to rebound following a weak year.

In reality, leisure passengers usually book months in advance. This compels the airlines to price these seats rather high before revising the fares to reflect the market response.

For business travellers, airlines offer low prices to fill a minimum capacity before hiking the fares substantially as corporate passengers have a tendency to book the seats at the last minute.

The price of an air ticket covers taxes, costs of aircraft maintenance, takeoff and landing fees, aircraft cost and amortisation, insurance as well as fuel and staff costs.

According to the IATA, fuel is such a large cost that the aviation industry is pushing to improve fuel efficiency, by replacing aircraft, improving operations and attempting to persuade governments to remove airspace and airport inefficiencies that waste around 5% of fuel burn each year.

Next year, the IATA forecasts the airlines' fuel bill will decline to $182 billion, which will represent 22.1% of average operating costs.

This decline is due to the delaying effect of hedging and the continuation of low oil prices.

Jet fuel prices have declined with oil prices this year, said the IATA, basing its forecast on an average jet fuel price of $75.6/b next year and $63/b for Brent crude oil.

The global air transport association predicts jet fuel prices will be closer to oil prices than previously expected, mitigating fuel costs.

Fares only one aspect

Andrew Matters, IATA's deputy chief economist, told the Bangkok Post that airlines operate in a highly competitive industry. This competition has delivered significant benefits to consumers through lower airfares.

"We estimate that over the past two decades, the real cost of air travel has halved, while the number of city-pairs connected by regular air service has more than doubled," he said.

However, he argued that "price is only one element on which airlines can compete".

"Airlines attract customers by differentiating their product from their competitors in various other ways like via their network and flight schedules, providing ancillary services and the quality of their customer service and airline product tailored for their customer," Mr Matters said.

Avoiding price wars

For Thailand-based airlines, fare competition is an area in which they must tread carefully.

Budget carrier Nok Air has announced it will not open new international routes to popular destinations to avoid price wars with other airlines.

The airline CEO, Wutthiphum Jurangkul, expects competition to remain fierce for low-cost carriers with a price war continuing well into next year.

Santisuk Klongchaiya, chief executive officer of Thai AirAsia, agreed that the aviation industry competition is in high gear which makes adjusting fares to augment revenue a matter that should be carefully considered.

For 2019, fares for Thai AirAsia domestic flights achieved a 5% growth while fares for international flights will be dependent on the value of the baht.

"Regardless, cutting fares to stay competitive may not be the best solution at this time," he said.

The airline is focusing on efficiently managing capital alongside developing service quality and maintaining punctuality, safety, and a variety of routes and flights to correspond to passenger demand.

"These strategies should allow us to compete in the long term," the CEO added.

AirAsia has implemented policy and commercial measures to make capital management more adaptive and expand revenue streams. Recently, AirAsia joined other carriers in proposing to the Ministry of Finance a reduction of fuel duties for domestic flights in aid of businesses that are operating at a loss.

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