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There is an old saying in aviation that airlines make money when fuel is cheap and lose sleep when it isn’t.

Right now, there is likely a shortage of sleep in boardrooms across Australia’s aviation sector.

As conflict in the Middle East continues to unsettle global energy markets, soaring jet fuel prices are forcing Australia’s airlines to make tough decisions. Unfortunately for travellers, those decisions are landing squarely in their laps through higher airfares, fewer flights and reduced choice on some domestic routes.

According to the latest report from the Australian Competition and Consumer Commission (ACCC), airlines are responding to a dramatic rise in fuel costs by trimming capacity, suspending services, and increasing fares to protect already thin operating margins.

Anyone hoping for a bargain airfare in the coming months may need to lower their expectations rather than their travel budget.

The numbers tell the story.

Jet fuel prices were more than 40 per cent higher in early June than they were in mid-February this year. Even more concerning for airline accountants, refining margins and the cost of turning crude oil into aviation fuel have surged. The gap between Brent crude oil prices and jet fuel prices was 64 per cent higher in early June than it was just a few months earlier.

For airlines, fuel is not simply another business expense. It is often one of the highest costs on the balance sheet.

When fuel prices climb sharply, airlines generally have three choices. They can absorb the costs and watch profits disappear. They can increase ticket prices. Or they can reduce services.

Australia’s major carriers appear to have chosen a combination of the latter two.

ACCC Commissioner Anna Brakey said the impact of rising fuel costs is already being felt across the network.

“Higher jet fuel prices are driving significant changes in how airlines operate, including reducing or suspending services and increasing fares on some routes,” Ms Brakey said.

“We’ve seen services paused or withdrawn on routes such as Adelaide to Mount Gambier, Alice Springs to Brisbane and Darwin to the Gold Coast, meaning fewer travel options for some communities.”

And therein lies the challenge.

While travellers flying between Sydney, Melbourne, and Brisbane may grumble about paying a little more, regional communities often feel the pain first and hardest. Every route withdrawal means fewer travel options, reduced connectivity and another hurdle for regional tourism operators already competing for visitors.

The Qantas Group and Virgin Australia have both relied on fuel hedging strategies to soften the immediate impact of rising prices. By locking in fuel purchases ahead of time, airlines can shield themselves from some market volatility.

However, even the best hedge eventually runs out.

Virgin Australia has reportedly increased domestic economy and business fares by around 5% since March. Qantas has remained tight-lipped about the exact size of its increases, although both airline groups have indicated they intend to recover at least part of their higher fuel costs through a combination of fare rises and reduced capacity.

For consumers, that translates into a simple equation.

Less supply.

Higher prices.

Fewer choices.

Yet despite the rising costs, Australians continue to travel in remarkable numbers.

If there is one thing the travel industry has learned since the pandemic, it is that Australians place a high value on experiences. They may delay replacing the car or postponing the kitchen renovation, but holidays remain stubbornly resistant to economic pressure.

The ACCC report shows domestic travel demand remained strong throughout March and April.

Around five million passengers travelled domestically in both months, making April the busiest month for Australian domestic aviation since 2019.

The Easter school holiday period certainly helped, as did major events such as the AFL Gather Round in Adelaide and the Australian Grand Prix in Melbourne.

“Demand has remained resilient over recent months, supported by holiday travel and major events,” Ms Brakey said.

That resilience has become one of the defining stories of Australia’s travel recovery.

Travel demand continues to surprise forecasters, airlines and economists alike.

Many travellers booked months in advance before the latest round of fare increases took effect, which explains why average airline revenue per passenger actually fell by 3.4 per cent in April despite rising ticket prices.

That situation is unlikely to last.

“With many travellers booking well in advance, particularly around holidays and major events, the latest data does not fully show the effect of higher airfares,” Ms Brakey said.

“We expect this to become clearer over coming months and will continue to monitor the impact on consumers and the broader aviation sector.”

There was at least one piece of genuinely good news in the ACCC report.

Flights are arriving on time again.

After years of operational disruptions, staffing shortages, weather interruptions and frustrated passengers staring at departure screens, April delivered the strongest reliability performance seen in years.

The industry’s on-time arrival rate reached 82.9 per cent, the highest level recorded since February 2022.

Qantas achieved an impressive 85.8 per cent on-time performance, while Virgin Australia continued its reputation for consistency with the lowest cancellation rate in the industry at just 0.8 per cent.

“It’s encouraging to see on-time performance at its highest levels in recent years, giving travellers more confidence that their flight will arrive at the time they booked,” Ms Brakey said.

For an industry often criticised when things go wrong, it is a welcome reminder that operational improvements are beginning to bear fruit.

Looking ahead, there may be another development capable of reshaping Australia’s aviation landscape.

Competition.

The ACCC report notes interest from two potential new airline entrants, Zinc Airlines and Koala Airlines.

Whether either ultimately succeeds remains to be seen.

History offers a cautionary tale. Australia has witnessed its fair share of ambitious airline start-ups over the decades. Some soared. Many disappeared almost as quickly as they arrived.

Airlines are glamorous from the passenger seat. From the balance sheet, they are among the toughest businesses in the world.

Still, the prospect of new competition is likely to be welcomed by consumers.

“Australia’s domestic airline sector remains highly concentrated, with the Qantas Group and Virgin Australia operating 98.5 per cent of passenger flights,” Ms Brakey said.

“We welcome credible interest from potential new entrants and the positive impact this could have for consumers.”

The ACCC believes additional competition could place downward pressure on fares, improve route choice and deliver better outcomes for travellers.

That is certainly the hope.

For now, however, Australia’s domestic aviation market remains caught between strong demand and rising costs.

Passengers are still flying.

Airlines are still filling seats.

But fuel prices are once again reminding everyone that aviation remains deeply vulnerable to events unfolding thousands of kilometres away.

The view from 35,000 feet may still be spectacular.

Paying for the ticket is becoming a little less enjoyable.

For the full ACCC Domestic Airline Monitoring Report, visit:
https://www.accc.gov.au/by-industry/travel-and-airports/domestic-airline-monitoring.