High Flying Prices: Inflation's Effect on Air Travel

As the warm embrace of summer approaches, people worldwide are dusting off their suitcases and dreaming of sun-soaked destinations. However, this year’s vacation planning has been overshadowed by the unwelcome surprise of sky-high airline ticket prices. Consumers, eager to understand why their dream getaways are becoming increasingly expensive, are searching for answers. In this comprehensive article, we will explore the numerous factors behind the surge in airline ticket prices, with particular focus on the role of global inflation in shaping today’s travel landscape.

The current worldwide inflation spike has taken many by surprise, as both headline inflation (which encompasses the price of all goods and services) and core inflation (excluding food and energy) have risen significantly above target in most advanced economies and several emerging markets since early 2022. This broad inflationary trend has impacted various sectors of the economy, including the aviation industry, which is now grappling with the challenges of adapting to this new economic reality.

To understand the roots of today’s inflationary environment, it is essential to examine its primary drivers. Three main causes have contributed to the rampant inflation rates that are currently stoking fears of a recession. First, the policy of cheap money that was adopted in the aftermath of the Great Financial Crisis inadvertently laid the groundwork for the current inflationary climate. Second, the COVID-19 pandemic brought about disrupted supply chains and production stoppages, further exacerbating the inflationary pressures. Lastly, the ongoing energy crisis, a direct consequence of the war in Ukraine, has played a significant role in pushing inflation to new heights. The pandemic, in particular, has had a two-fold impact on global supply chains. Initially, the lockdowns and mobility restrictions led to severe disruptions, causing short-term supply shortages across various industries. While many of these disruptions have since eased, the lingering effects continue to ripple through the global economy, contributing to the upward pressure on prices.

Since the beginning of the pandemic, the airline industry has faced unprecedented challenges, with many airlines drowning in debt and struggling to return to a state of profitability. As travel restrictions ease across the globe and pent-up demand for travel resurfaces, airlines are eager to serve travel-deprived consumers. However, they must also grapple with higher operating costs, such as a dramatic increase in jet fuel prices, which ultimately leads to the inflation of airline ticket prices.

According to the International Air Transport Association (IATA), the price of jet fuel has skyrocketed by nearly 150% in the last year. This significant increase can be attributed to the ongoing energy crisis, triggered by factors such as Russia’s military offensive in Ukraine and the increased demand from economies recovering from the COVID-19 pandemic. As jet fuel prices continue to surge, the cost of air travel inevitably rises, placing upward pressure on ticket prices.

In addition to the higher jet fuel prices, airlines are also confronting a shortage of pilots and flight attendants. This labor scarcity, in part due to the pandemic’s impact on the industry, has forced airlines to compete for available staff, driving up labor costs. As a result, airlines must find ways to offset these increased expenses, which often leads to passing the additional costs onto consumers through higher ticket prices.

Willie Walsh, the director-general of the International Air Transport Association, has confirmed that the high price of oil will result in more expensive airline tickets. In an interview, Walsh explained that oil is the single biggest element of an airline’s cost base, making it inevitable that high oil prices will be passed through to consumers in the form of increased ticket prices. Consequently, surging oil and gas prices, along with rising global inflation, are directly impacting the cost of air travel.

DEEPER DIVE IN THE CHANGE OF PRICES IN THE AIRLINE TICKETS

Renowned French economist Emmanuel Combe has outlined three main parameters that dictate airline ticket prices, providing valuable insight into the complexities of the industry.

First, ticket prices hinge on variable production costs, such as jet fuel that we previously discussed. The lower these costs are, the lower the ticket price, assuming other factors remain constant. Low-cost airlines, such as Ryanair, can offer more affordable tickets than traditional carriers due to their significantly lower cost per seat-kilometer (3 cents for Ryanair versus 9 cents for a conventional company on a medium-haul flight). If variable costs increase, airlines will pass this on to the ticket price, with the extent and speed of this pass-through dependent on factors such as profit margins and competitive dynamics. Companies with strong margins may initially compress them to maintain customer loyalty, while airlines facing an asymmetric cost shock, like a salary increase, may be hesitant to pass on the cost for fear of losing customers to rivals. But since the oil inflation is not a temporary shock, holding hands with what feels like a never ending war in the East of Europe, the companies have no other choice but to apply the production cost increase to the ticket price.

Second, ticket prices are influenced by the intensity of market competition. In highly competitive markets, it is challenging for companies to set prices above their costs. However, monopolies can charge high prices without worrying about customers flocking to competitors. Low-cost airlines exemplify this phenomenon; they can set high prices on routes with weak competition. The Paris-Toulouse route during the Air France pilots’ strike in September 2014 demonstrates this, as competitors seized the opportunity to increase capacities and prices.

Lastly, ticket prices depend on demand levels. During high-demand periods, such as the summer season, prices for the same tourist route will be higher than in the winter season. Complicating matters further, airlines practice « yield management, » adjusting ticket prices for the same flight in real time based on the aircraft’s occupancy rate. When a flight opens for booking, the first seats are sold at cost, but customers must commit well in advance. As the departure date approaches, prices rise. Last-minute customers, unable to anticipate their departure date, have limited options and pay higher prices. Consequently, the last person to buy a ticket may pay over ten times the price paid by an early-booking seatmate.

CONCLUSION

In conclusion, as we all dream of relaxing on sun-kissed beaches, sipping a cocktail, and attempting to transform our pasty winter complexions into a sun-kissed glow, the current economic landscape is throwing a proverbial wet towel on our plans. The myriad factors contributing to the surge in airline ticket prices can be likened to a complex layer cake of inflation, supply chain disruptions, labor shortages, and an energy crisis. Unfortunately, this cake is far from sweet and tastes more like bitter lemons.