Australian domestic airfares edged marginally higher in July in both business and economy class.
The Bureau of Infrastructure, Transport and Regional Economics (BITRE) measure of domestic business class airfares was at 94.9 index points in July, up marginally from 94.2 points a year earlier.
Meanwhile, the best discount economy index rose to 59.9 points, compared with 57.4 points in the prior corresponding period.
And the restricted economy index was at 82.2 points, up from 78.9 points in July 2016 and at the highest level since a change to the index in June 2011 when Virgin Australia and Jetstar introduced simplified fare structures that brought down the cost of so-called flexible fares.
The BITRE air fare series is a price index of the lowest available fare in each fare class, weighted over selected routes.
The creeping up in fares has coincided with Australia’s major carriers Virgin and Qantas holding capacity levels steady in an effort to improve the bottom line and better match the number of seats in the market with demand.
Indeed, recent figures from the International Air Transport Association (IATA) said demand in the Australian domestic market had gone backwards in the year to May 2017, with revenue passenger kilometres (RPK) down 0.3 per cent and capacity measured by available seat kilometres (ASK) falling 2.9 per cent, compared with the prior corresponding period.
Australia was the only domestic market to go backwards in terms of RPKs in the year to May. With capacity being cut more than demand, load factors were up two percentage points to 77.4 per cent.
S&P Global Ratings, formerly known as Standard and Poor’s said in a recent research report Australia’s domestic market had “bucked the global trend by moving sideways”.
Further, the decline in mining investment would dampen demand on fly-in/fly-out routes and trans-continental flights from Perth to Australia’s east coast. Tepid wage growth and high levels of household indebtedness would also weigh on consumer demand.
“We expect capacity growth to remain broadly flat with a mild contracting bias over the next two years,” S&P Global Ratings analyst Graeme Ferguson wrote in the report dated June 27.
“The rate at which excess capacity washes through the system will, therefore, be largely determined by domestic demand conditions, which we view as mixed.”
On a more positive note, S&P Global Ratings said tourism, particularly from the Chinese market, has been boosted by a lower Australian dollar.
“Both carriers have done a good job of shifting capacity away from challenging markets and towards growth markets,” the report said.
“Given these factors, we believe capacity utilization (load factor) is likely to moderately improve over the next couple of years.”