External cost pressures, geopolitical dynamics critical factors in shaping airfare trends

Higher airfares will have a range of economic, social, and environmental impacts such as inflationary pressure, reduced demand for travel, increased costs for businesses and strain on lower-income travellers.

A recent report said global airfares are set to become more expensive in 2025 even as gains moderate with ticket prices reflecting higher costs and lingering supply-chain disruptions.

According to an American Express Global Business Travel Group (GBT) forecast, the slower climb in ticket expenses is a levelling off from this year’s steep post-Covid increases, the global corporate travel manager said in its annual report on the cost of flying.

Fares on most routes will rise, though the size of the increases will likely vary greatly by region. North America and Europe are expected to see more “modest” increases of around 2% while Asia and Australasia, among the last regions to unwind pandemic curbs, are set to see rises of close to 14%.

While airlines are largely more bullish about demand in 2025, their near-term efforts to add capacity remain hampered by delays in both new Airbus and Boeing planes, as well as longer servicing of jet engines that prevent more aircraft from taking to the skies.

Increases in ticket prices next year are likely to more than erase any decreases before 2024, meaning some fares may return to post-pandemic highs, Bloomberg News calculations based on the Amex GBT data show.

The key drivers pushing up airfares include rising wages and staffing shortages, particularly with the ongoing labour disputes in North America and the cost of fuel amid ongoing geopolitical tensions, the report added.

According to analysts, higher air transportation costs will result in increased costs of goods and services, potentially fuelling inflation.

Obviously, increased air cargo costs will escalate prices for high-value, time-sensitive goods such as electronics and pharmaceuticals. This could contribute to global inflation and disrupt supply chains.

Higher airfares increase the cost of transporting perishable or high-value goods, making exports from remote regions less competitive.

Higher airfares are likely to discourage discretionary travel, leading to fewer leisure and non-essential business trips. This could negatively impact airlines, tourism sectors, and related industries such as hotels, restaurants and local attractions.

In particular, countries that are heavily reliant on international tourism will face reduced visitor numbers, impacting their hotels, restaurants, and local businesses. This could slow GDP growth and increase unemployment in tourism sectors.

Companies that rely on frequent business travel will face higher expenses, potentially leading to cost-cutting measures like reducing trips or shifting to virtual meetings.

Higher prices disproportionately affect budget-conscious travellers, reducing their access to air travel for work, education, or family visits.

From an industry perspective, airlines might target high-margin segments such as business and luxury travellers to maintain profitability.

Dwindling demand will force carriers to reduce the frequency of flights, trim routes, or adopt fuel-efficient technologies to mitigate costs.

Airlines may explore alternative fuel sources or more efficient aircraft to manage rising operational costs and maintain affordability in the long term.

The global body of airlines- International Air Transport Association or IATA says factors such as high jet fuel prices, sustainability initiatives, and fleet upgrades continue to pressure airfare levels. These could lead to a moderate rise in fares globally, estimated at 3%-7%, though regional variations may occur.

IATA has underscored the importance of addressing supply chain disruptions, regulatory compliance costs, and geopolitical tensions, which could significantly affect industry economics and ticket prices.

While IATA is optimistic about stabilising fares and improving industry resilience, external cost pressures and geopolitical dynamics remain critical factors in shaping airfare trends.