Where do airlines stand in 2023? Industry observers on airfare trends and profit margins
Where do airlines stand in 2023? Industry observers on airfare trends and profit margins
With the price of airfare expected to drop early in the new year following a surge last summer, industry observers say continued competitive pricing in the market may not bode well for airlines.
Non-seasonally adjusted consumer price index (CPI) figures from Statistics Canada show that the cost of air transportation in Canada rose approximately 46.5 per cent between January 2022 and this year's high posted in August.
Despite dropping more than 18 per cent through September and October, air transportation remains above pre-pandemic levels. Meanwhile, seasonally adjusted CPI figures from the U.S. have followed a similar trajectory.
"Whether it was domestically, whether it was to the U.S., whether it was to Asia, whether it was to Europe, airfares did climb and it was in response to a significant demand in the marketplace, where services were being offered, and that continued in the summer," said John Gradek, McGill University academic programs co-ordinator in supply chain, logistics, operations and integrated aviation management.
Gradek told CTVNews.ca in a telephone interview that the COVID-19 pandemic and government restrictions on air travel crippled demand, causing airlines to drop fares to entice more people to fly.
As many travel restrictions were lifted earlier this year, along with new competition from a number of low-cost carriers, Gradek said demand increased and airlines decided to increase their level of capacity. When demand did not soften, airports became overwhelmed.
Now, as typically occurs in the fall, demand has fallen and fares have dropped in order to stimulate demand again.
"I would say that airfares that you have now showing up in the marketplace are pretty close to what we had in the depths of the pandemic when there was very little demand," Gradek said. "So carriers have basically reverted to mid-pandemic pricing levels."
Tae Hoon Oum, a professor at the Sauder School of Business at the University of British Columbia, told CTVNews.ca in an email that airlines have lost a lot of money during the pandemic and are sitting on large amounts of debt.
"They want to make money by charging high prices since many current traveller(s) became insensitive to price, especially premium economy or business class travellers," he said.
Staff loss and inadequate training also mean airlines, on the supply side, aren't able to offer more flights and naturally can charge higher prices for flights, most of which are full, Oum added.
While ticket prices do increase over the holidays, Gradek said this won't last long.
A search Monday on Flair Airlines' website shows that the price of a one-way ticket between Toronto and Calgary on Dec. 22 costs $360 compared to between $59 and $79 from mid- to late-January.
This, Gradek argues, puts airlines in a position where they don't want to be priced out of the market by selling too high, but also won't see much profitability as a result.
Many carriers could end up on shaky ground financially, he says, at a time when consumers also may be considering how much discretionary income they have to travel.
"So the question you have to ask yourself is: Is this something that's going to be acceptable longer term in the marketplace?" Gradek said.
With files from CTVNews.ca Writer Tom Yun and CTV National News Correspondent Heather Wright
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