- 2022 bright for the global aviation industry
- Expected to return 50 percent of demand compared to 2019 levels
- Cheap fare business model implemented from 1970s to early 2020s
2022 looks bright for the global aviation industry after two of the worst years due to the COVID-19 pandemic. However, the opportunity for travelers to travel at a lower cost may prove to be short-lived. According to the ‘International Air Transport Association’, international passenger demand in 2020 was less than 25 percent compared to 2019. Data for 2021 is not yet available but, given the delta and omicron nature of the coronavirus, the association’s forecast of a demand return of 50 percent compared to 2019 levels is optimistic.
With the reopening of international and domestic routes, airlines are offering several special offers on airfares. These proposals are partly to lure back unsuspecting travelers and to cover costs incurred by passengers traveling internationally, such as fees for COVID testing. But don’t expect cheap fare refunds. Their duration may be short as the industry has to deal with the post-pandemic situation and government support is also not likely to be available.
Industry may leave business model of cheap rent
This means that the industry may abandon the cheap rental business model through the low profits implemented from the 1970s to the beginning of 2020. The aviation industry was highly regulated until the 1970s. Domestically, this was often done by governments to protect state-owned airlines. For example, Australia’s “two airline” policy limited competition on major routes to only two airlines—state-owned Trans Australia Airlines and a private competitor (Ansett Airlines for the time being).
Internationally, airfares were kept high by price cooperation through the International Air Transport Association (IATA), often described as a ‘cartel’. There were two tiers of ticket pricing – First Class and Economy. In the past, there were Boeing 707 aircraft that could carry 180 passengers. Then after the introduction of the Boeing 747 jumbo jet in 1970, the number of passengers started increasing from 180 to 440. This led to many changes in aviation operations and costs.
Subsequently, in the 1980s and 1990s, travel agents began to establish themselves as “bucket shops”, specializing in offering discounted airfares to fill vacant seats at less popular airlines. Australia’s two-airline policy expired in October 1990. Regulation allowed more competitors and airfares began to be market driven rather than set by regulatory bodies.
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Why the era of cheap rent may end
The fall in prices is dependent on adopting a business model based on low profit per customer and inducting more customers into the flight. With more customers flying on larger planes, the per passenger fee comes down. This business model contributed to the number of global tourists that grew from about 166 million in 1970 to 1.5 billion in 2019. But it also meant that airlines needed planes full of passengers to make a profit.
Next year it is likely that we will see integration within the industry, with airlines looking to diversify into other businesses such as catering or insurance. Low-cost airlines will continue to operate, but they will have to prepare customers to pay for amenities such as seat-plus breakfast, extra luggage capacity or booking a rental car. Higher margins with lower passenger numbers seem like a more likely model in the coming days.
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