On The Up And Up

The Age

Saturday April 9, 2005

CLIVE DORMAN

According to the federal Bureau of Transport and Regional Economics, the increase in domestic discount prices could be as much as 26 per cent in the half-year to February.

That's using data from the Sabre reservations system, calculating average discount fares paid over the period. By another, perhaps more accurate, measure, the availability of the cheapest fares on the internet, the increase is a more modest 11.8 per cent. Either way, fares are on the rise and everything indicates they will keep going up before they start dropping again.

The latest hikes are mainly to do with the rocketing oil price. You can blame all those energy-hungry North Americans, fan-forcing hot air through their condos during an exceptionally cold northern winter and increasing the demand for home-heating oil which, in turn, drives up the price of aviation fuel. Not long ago airline fuel cost about 25 cents a litre; it is now more than 50 cents. The fuel bill used to be about 20 per cent of an airline's costs. Now companies are locking upper-storey windows to stop their accountants from jumping.

In Australia, Virgin Blue is especially vulnerable because it isn't as expert as Qantas in manipulating financial instruments such as the oil-price-hedging market. While Qantas is largely protected from the latest oil price shock, Virgin's limited hedging has run out, meaning it faces massive pressure on prices.

If Virgin has to increase its fuel surcharge again, Qantas is sure to follow. However, the main brake on airfares at the moment is Jetstar. It doesn't have the luxury of being able to bung on a price increase. It is bringing new planes into the market almost every month and price-savvy Australians aren't going to fill them unless there's value for money on offer.

There's no such brake on price increases for international flying. American Express, which monitors airfares in the Asia-Pacific region, says that international airfare discounts from Australia are 11.9 per cent higher than they were a year ago. Moreover, discount fare levels from Australia are rising four times faster than they are for travel from the region as a whole. The rest of the Asia-Pacific averaged discount airfare increases of only 3.4 per cent in the same period.

Yes, it's mainly because of the cost of fuel. But Amex says it's also because of a new drive by airlines in the region to reduce the gap between the payments made by business and leisure travellers. According to this analysis, the airlines are trying to stop business travellers moving down the cabin and taking advantage of cheap fares, so they're ramping up discounts to take away the incentive.

It all sounds fine in theory (from their point of view) but there's a fundamental flaw in the logic: if economy fares start rising, people (especially Australians) will find a cheaper domestic trip or stop travelling. If the back of the plane starts emptying, the ludicrous house of cards that airline pricing is built on - where a few people up the front pay stupid money, the rest get a bargain and somehow the airline makes a marginal profit if nothing changes - starts to collapse.

But don't despair. Price competition keeps breaking out, even for international travel. Some recent examples (courtesy of frequentflyer.com.au): about $740 return for Sydney to Hong Kong on the new Virgin Atlantic service; $98 return (Singapore dollars, roughly the same as ours) Qantas between Perth and Singapore to counter discounting by Singapore-based cheapie Valuair.

Just watch out for the two-part pricing trick. The price of a special that might catch your eye is usually a few hundred short when you add taxes and charges.

clivedorman@hotmail.com

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© 2005 The Age

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