Who’s really paying for your cheap flights?

Graham Cooke 6 March 2017

How the "class gap" in Australian aviation is widening and why it benefits you.

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There are currently three major players in the Australian aviation space: Qantas, Virgin Australia and Tigerair. The latter, which only entered the Australian market in 2007, specialises in no-frills flights. It followed the entry of Qantas’s low-cost carrier, Jetstar, three years earlier. These budget brands have helped put downward pressure on the price of the average economy flight here in Australia. In fact, the average lowest-price ticket available today costs about half of what it did in 1997, adjusted for inflation.

The top chart below depicts the 13-month average cost of no-frills economy fares and business-class fares over time. We’ve compiled the chart using the average price of 68 domestic Australian flights in March and April 2017 across Qantas, Virgin Australia, Tigerair and Jetstar and used the Department of Infrastructure’s CPI-adjusted historical index data to extrapolate the approximate average cost of airfares dating back to 1992.

The price of the lowest-cost airfares fluctuated but did not drop much between 1992 and the turn of the millennium. An economy airfare in the late '90s would have cost you well over $400 in today’s money. Prior to this, the market was dominated by Qantas and failed competitor Ansett. In 2000, Virgin Australia (then Virgin Blue) entered the market and shook things up dramatically. Increased competition immediately drove the price of domestic economy tickets down.

Interestingly, this only happened with economy tickets. The cost of travelling in business class actually went up as the airlines began to more heavily leverage their higher-paying customers. In fact, business-class ticket prices have increased by about 40% since 1992, reaching a peak of $1,600 in 2011. Business-class fares fell sharply at the end of that year due to wide-ranging discounts on business-class seats across the Qantas network, and further in 2012 due to a significant increase in the number of business-class routes with Virgin. Prices, however, quickly returned to pre-2011 levels.

The lower chart depicts the average business-class fare as a proportion of the average lowest-cost economy fare over time. From this we can see that the average business-class airfare has risen from 2.5 times the price of an economy ticket in 1992 to 6.4 times today, with the gap peaking at 8.4 times in 2011.

So, while it’s true that there are many bargains to be had if you simply want to get from A to B, anyone hoping for a bit of luxury will have to pay a lot more. It’s those guys and girls in business suits with gold flying status who are (or whose bosses are) paying the bulk of the cost of your flight. This might be nice to think about next time they skip you at boarding.

Graham Cooke's Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au. The routes used for this research were Sydney-Perth, Melbourne-Brisbane, Hobart-Melbourne, Adelaide-Perth and Sydney-Melbourne on 13 and 18 March and 10 and 22 April 2017.

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