Expanding ... Richard Branson's V Australia plans to further extend its reach overseas. Photo: AP
Oversupply has driven down the cost of international flights — and the carriers can't sustain it, writes Clive Dorman.
It could be 18 months before we see the end of ultra-cheap international air fares from Australia because of a unique coincidence of forces in the airline industry.
The global financial crisis is the backdrop, not the root cause, of the phenomenon in international travel where air fares from Australia have dropped to as low as $1000 return to the US and Europe.
Branson launches V Australia
British billionaire and showman Richard Branson has declared war on Qantas and other rival airlines with the launch of his new fleet of V Australia passenger jets to fly the Australia-US route. Photo: AP
The leading regional aviation think-tank, Sydney's Centre for Asia Pacific Aviation, says Australia is at the eye of the storm.
"We're seeing double-digit increases in airline capacity [to Australia] at a time when the natural level of demand is well below that," says the centre's chief operating officer, Derek Sadubin. "We're seeing a capacity-led increase in travel, fuelled by very attractive lead-in fares. It's definitely unsustainable if things stay the way they are."
According to Sadubin, it could take up to 18 months before business travellers resume travelling in their usual numbers – the key factor that is driving the extremely low air fares.
"The airline industry is cyclical and what we're seeing at the moment is a counter-cyclical situation, whereby airlines are trying to establish a position in the market," Sadubin says. Translation: airlines should be cutting back capacity because of falling demand but some are increasing capacity to buy market share and are, therefore, having to reduce fares to fill thousands of empty seats.
"This is due to a number of structural changes that are occurring in the aviation industry," Sadubin says. "One of them is consolidation in the US and Europe [airlines taking over other airlines], which is prompting carriers like Delta to expand everywhere."
Delta is expanding into Australia, Asia, Europe, South America and Africa from its global hub at Atlanta, Georgia.
"We are also seeing new airline entry based on low-cost operating models, so the likes of V Australia and AirAsia X are entering the market [from Australia]," he says.
"On top of that, you've got the Middle East carriers [Emirates, Etihad and Qatar] expanding rapidly.
"So, those three factors are having a major impact on airline strategy. It's playing out in the Australian international market and the result is fantastic for airports and travellers but very difficult for airlines trying to make a dollar."
One of Australia's bigger online travel agents, travel.com.au, says it has found a quarter of Australian international travellers are booking travel on impulse because air fares are so cheap.
As a consequence of the cheap air fares, it says consumers, on average, are buying international tickets just two to three months before they travel. The usual time frame is four to six months.