October 2018, Las Vegas
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2018’s airfares will take off
With international traveller numbers set to soar next year, could we see firms like Airbnb, Google, Alibaba and Tencent taking flight bookings?
Airlines had ‘good times’ in 2017, with international passenger numbers up 7.5%, says their industry association, the International Air Transport Association (IATA), in spite of the challenges caused by the likes of hurricanes and travel bans. Best news of all for the airlines is that while 2018 may not see quite such a big jump in numbers, ticket prices are forecast to rise.
As a result, airlines should be spared some of the pressure to build loyalty scheme memberships, sell air miles, cut out the OTAs by boosting direct sales, and widen the range of ancillaries and website sales.
All of that is very big business. US-based Stifel Financial guestimates that airlines in the US, at least, could be earning up to 50% of their income from selling air-miles to credit card companies. CarTrawler’s last annual ancillary revenue estimate for the Top 10 airlines put the figure at over $28 billion.
Airline interest in direct connectivity has been rising as Lufthansa seems to be suffering little impact from its 2015 launch of a major investment and commercial effort for direct sales, cutting out the OTAs.
The Chinese government has ordered its state-owned airlines to sell at least half of all tickets directly in 2018
A few weeks ago British Airways and Iberia introduced an £8 fee per ‘fare component’ on GDS bookings, matching Lufthansa’s €16-per-booking GDS fee imposed two years ago. Lufthansa and Air New Zealand have also signed a partnership with Winding Tree, which is developing open-source blockchain distribution platform for the travel industry.
Meanwhile, the Chinese government has gone as far as ordering its state-owned airlines to sell at least half of all tickets directly in 2018.
Just in case they start to relax, however, airline boards should read Atmosphere Research’s warning that disruptors could emerge from majors not in flight distribution. Flight booking could be an option for ‘Airbnb, Google, Alibaba or Tencent’, it suggests, as air travel numbers become more attractive.
“International tourists travelling by air are expected to spend more than $750 billion in 2018, a rise of 15% in just over two years,” Alexandre de Juniac, IATA’s Director General and CEO, said earlier this month. He named economic growth as the main driver.
IATA believes 2018’s fares will rise globally by around 3% after a six-year decline. Carlson Wagonlit Travel, the global travel management company is going for even more, at 3.5%.
Others are not so sure: US research group Hopper, for one, points to rising levels of capacity and competition on many US routes, for example. Globally, the low-cost sector of the industry continues to exert pressure, growing and taking market share. However, none of that seems to be holding back industry profitability!
“Strong demand, efficiency and reduced interest payments will help airlines improve net profitability in 2018 despite rising costs. 2018 is expected to be the fourth consecutive year of sustainable profits with a return on invested capital (9.4%) exceeding the industry’s average cost of capital (7.4%), de Juniac stated in a press release.
Not all roses
That’s not to say that life is all roses, thanks to public relations disasters, rising labour costs, uncertain fuel costs and the vagaries of governments. And, as Ryanair found, it does not pay to be over-confident as demand for pilots soars.
Yet 2018 passenger traffic is expected to grow at the only slightly lower rate of 6% to 4.3 billion, though that is still up on the 5.5% average of recent years and will be slightly ahead of capacity. The average load factor is thus expected to rise to 81.4%, drive a 3% gain in yields and push passenger revenues up by 9.2% to $581 billion.
US airlines, around half the industry by revenue, says IATA, “are forecast to generate the strongest financial performance with net profits of $16.4 billion in 2018 (up from $15.6 billion in 2017).” In Asia, passenger conditions vary widely, with domestic markets strengthening in China, India and Japan.
In 2018, US airlines are forecast to generate the strongest financial performance with net profits
“New low cost market entrants in the ASEAN (Association of Southeast Asian Nations) region are intensifying competition and contributing to keeping profitability low. But there has been a pause in competitive pressures from the “super connectors” on long-haul routes as they face various challenges in their home markets,” says IATA.
In Europe capacity increases at 5.5% are trailing a 6% rise in demand, so the region’s performance is strengthening. In South America, modest recovery in Brazil and an increase in demand over supply (8% against capacity growth of 7.5%) is driving momentum. Africa is again expected to make a small loss, in spite of increasing demand.
Middle East demand is forecast to grow by 7%, outpacing announced capacity expansion of 4.9% (the slowest growth since 2002). “The region’s carriers face challenges to their business models, and from low oil revenues, regional conflict, crowded air space, the impact of travel restrictions to the US, and competition the new “super connector” (Turkish Airlines)”, says IATA.
Rising passenger traffic is not limited to international flights - domestic demand has been climbing too, India and China are continuing to lead all markets with double-digit growth rates. However, local journeys are often less than smooth – the MediaIndiaGroup website published government figures showing new airline Zoom Air as having a cancellation rate of 76% in July. And an Indian survey listed “baggage, customer service and flight problems” as major problems, which does not leave much else!