Airline executive has some bad news for travellers expecting cheaper fares

Air France-KLM Group’s Australian-born executive vice-president says we shouldn’t expect airfares to be cut anytime, thanks to inflation and supply chain issues.

Air France-KLM Group’s Australian-born executive vice-president says we shouldn’t expect airfares to be cut anytime soon given there’s high inflation and ongoing supply chain and aircraft maintenance capacity shortages.

Angus Clarke, son of the late David Clarke, co-founder and executive chair of Macquarie, was expected to follow his father into the world of corporate banking.

Instead, he divides his time between Amsterdam and Paris, overseeing 6000 staff at Air France-KLM.

The airline group just announced a record €30bn ($50bn) in revenue for 2023 which was up 14 per cent on the previous year. In comparison, the Qantas Group has just announced revenue for 2023 of $19.82bn.

Mr Clarke, an aircraft asset finance specialist, executive vice-president and chief commercial officer of Air France-KLM, told The Australian that “unfortunately for the consumer higher airfares are here to stay”.

Air France-KLM Group executive vice-president Angus Clarke. Picture: Jane Dempster

“Corporate travel is back at 80 per cent of pre-pandemic levels on much higher fare levels and there are very few signs that is going to change,” Mr Clarke said.

But there’s a caveat. If aircraft production rates increase and the industry returns to positive and sustained available seat kilometres (ASK) growth, then airfares will largely stabilise in line with inflation.

At present, average fares about 30 per cent higher than at the start of Covid-19 while OECD inflation has risen 20 per cent.

“Airline travel demand usually outpaces GDP growth between 1.5 and two times, so the airfare increase is modest when considering GDP growth and inflation,” Mr Clarke said.

“What will change is more point-to-point flying and direct routes which is good for the consumer,” he said, adding that today’s average wide-body aircraft was smaller than those constructed 10 years ago, allowing it to land on smaller runways.

As such, the new generation wide bodies such as the Boeing 787-9 allow airlines, such as Qantas, to re-enter destinations in secondary European cities that were previously unprofitable for larger aircraft.

Mr Clarke said that costs were structurally higher due to rising inflation in the two years to 2023. “These higher wage costs are now permanently embedded in the cost base of many industries including airlines,” he said.

“Airlines need these higher fares in order to be profitable.”

However, his views are at odds with travel agents.

Releasing Flight Centre’s first half-results last week, managing director and co-founder Graham Turner expected flight capacity within Australia to return to pre-Covid levels by the end of June and airfare prices to start normalising.

Flight Centre managing director Graham Turner.

Flight Centre, which operates across Europe, the Americas, the Middle East and Asia, expected international flight capacity to return to pre-Covid levels by the end of June; and it predicted airfares to drop by an average of 13 per cent in Australia and about 7 per cent globally.

Mr Turner said the federal government’s decision to block Qatar’s request for more flights had kept Australian airfares high, but Turkish Airlines’ entry to Australia had recently helped reduce prices.

“You can see the impact of greater capacity whether it’s Turkish, Singapore Airlines, Delta, United and that is why the fares in the last quarter have come down 10-15 per cent, and we believe they will come down 9 per cent in the next six months,” he told The Australian last week.

Mr Turner said that as Cathay and Singapore Airlines increased capacity, it would put competitive pressure on the Middle Eastern carriers en route to Europe.

But, from an international perspective, Mr Clarke believed travel demand was moving away from “Covid recovery” to a new normal level of demand.

And as travel demand improved, the opposite could be said of the supply chain.

“I anticipate (supply chains) will be a continued impediment to airlines growing well beyond their 2019 levels of capacity with problems ranging from the supply of engines (some engines are taking nine months to overhaul when it used to take three months), to the availability of new cabin products to aircraft production rates,” he said.

The world’s three major engine manufacturers – GE, Pratt & Whitney and Rolls Royce – had been plagued by a combination of labour and spare parts issues post-Covid.

Mr Clarke said that airlines, without a good fleet renewal plan, could be in for an unwelcome shock.

He said Boeing 787-10 and Airbus A350-900 were the leading widebodies in respect to unit cost and fuel efficiency. But while the Airbus A350 was delivering largely on time, the Boeing 787 was being delivered between four and six months late from “what was an already restructured delivery schedule”.

“Airlines with long-haul businesses that don’t already have these aircraft types on order are in for a nasty surprise in respect to availability of capacity and their ability to control their cost evolution and competitiveness,” he said.

Mr Clarke pointed out that aircraft manufacturer order books were already full for narrowbodies and widebodies.

“It is almost impossible to get delivery positions before 2028,” he said.

“Provided airlines remain rational … then revenue has a better than 50 per cent chance of outpacing cost.

“This will be the first time in the last 30 years of the industry that this has occurred, and all signs are pointing to a prolonged three to five year period of sustained airline profitability.”

Originally published as Airline executive has some bad news for travellers expecting cheaper fares