Airlines are price takers, don’t have influence on prices they pay: IATA Chief Economist

Geneva: Airlines are price takers as they do not have an influence on the prices they pay, IATA Chief Economist Marie Owens Thomsen has said and highlighted that carriers' need to diversify their revenues is complicated by slim profit margins as well as weak balance sheets. In a fast-growing aviation market like India where the air traffic demand is on the rise, there are persistent concerns about airfare trajectory and suggestions from various quarters to make air tickets more affordable.

Discussing overall airfares and the costs of airlines, Thomsen said airlines do not have any influence on the prices they pay. "There are too few aircraft manufacturers and oil companies. Whatever supplies we are looking at upstream, we are price takers and downstream, we have the hyper competitive environment where all customers can see all fares from all airlines at all times. So, we always compete in price," she told PTI in an interview in Geneva earlier this week.

Thomsen, who is the Chief Economist and Senior Vice President for Sustainability, said as airlines are price takers upstream and downstream, it leaves them with very little in the middle. A study published in November by the International Air Transport Association (IATA) showed that airfares have risen at a slower pace than consumer prices (measured by the Consumer Price Index, CPI) over the past decade. "This indicates that air ticket prices have not fully kept up with inflation, especially in comparison to jet fuel costs, which have significantly outpaced consumer inflation," the study said.

Currently, jet fuel accounts for around 30 per cent of airlines' operating costs. To a question on whether there can be more transparency in pricing of air tickets, Thomsen argued that if airlines were profiteering, the per passenger profit would have been much higher. "When you have high ticket prices and low airline profits, then the money is going somewhere else," she said, pointing out that a third and a 50 per cent of the airline industry's costs are administrative costs. "The rest (of the costs) is actually for services of flying people or cargo," Thomsen noted.

As per IATA's latest outlook for 2025, airlines are projected to have a net profit of $1.8 per passenger while the overall net profit expected to be $3.6 billion. "You can have a lot of activity and a big market and make no profit because your cost base is too high. Lot of them come from various types of regulatory fees and charges levied on airlines," Thomsen pointed out. According to her, there is a need for revenue diversification by airlines but the situation is complicated by slim profit margins and weak balance sheets most airlines suffer from. IATA represents around 340 airlines globally, including Indian carriers. The member airlines account for more than 80 per cent of the global air traffic.