Qantas decision to reduce flight capacity may have led to RBA rate hike, inquiry finds

Allan Fels has said the Qantas decision to cut capacity could have led to inflation and the Reserve Bank’s decision to raise interest rates. Photograph: Greg Wood/AFP/Getty Images

Qantas’ decision to reduce its domestic flight capacity and increase air fares in 2022 may have contributed to inflation and led the Reserve Bank to raise interest rates, a union inquiry into price gouging has found.

Former Australian Competition and Consumer Commission (ACCC) chair Allan Fels, who led the Australian Council of Trade Unions’ commissioned inquiry, was scathing of the effects a lack of competition in aviation was having on consumers.

“The duopoly in the aviation sector in Australia is dominated by Qantas and there is price gouging by Qantas,” he said.

Fels found that in 2022, when Australia’s freshly reopened internal and international borders triggered a surge in travel demand, airlines were responding to high fuel prices related to Russia’s invasion of Ukraine and made decisions that rippled through the economy.

In May 2022, Qantas cut its domestic capacity by 10%, noting an announcement to the ASX in June that the airline was “adjusting its domestic capacity levels for much of FY23 to assist with the recovery of sustained high fuel prices”.

The airline cut capacity a further 5% in July and August, Fels said, followed by another planned cut of 10% in October.

“Qantas said at the time that ‘the customer impacts from these schedule changes are expected to be minimal, with capacity being removed mostly from high frequency routes’,” Fels said.

In 2022, the ACCC warned airlines against deliberately slowing their return to full service capacity so they could “keep air fares high”. Government data from the time found cheapest available return domestic air fares were at levels not recorded since March 2004.

In December 2022, average return air fares between Sydney and Melbourne on budget carriers averaged $500. Australians facing the high air fares turned to overnight trains and coaches as cheaper interstate travel options, with services selling out.

Qantas would go on to post a record $2.47bn profit for 2022-23.

On Wednesday, Fels’ report found that airlines’ reduction in supply at a time of Australians’ increasing appetite for domestic travel may have had an inflationary impact.

“Qantas’ ability to reduce supply while increasing prices and suffering no material loss of market share, may have affected CPI (inflation) in December 2022, and therefore may have impacted the Reserve Bank’s inflation expectations and rate increases,” Fels said.

“Qantas fare increases over the three months to December 2022 were large enough to produce a sizable increase in the ‘holiday travel and accommodation’ contribution to inflation,” Fels said

Fels found that Qantas’ fare increases possibly accounted for up to 25% of that category’s increase in the December quarter as it appeared in the ABS CPI measure. That quarter, the ABS identified the recreation and culture category, which includes domestic and international travel, as the group that contributed the most to inflation.

“A quarter of [that category’s] inflation that month was mainly due to Qantas aggressively raising air fares although Virgin may have also contributed,” Fels said.

At the beginning of 2022, interest rates were 0.1%. In May 2022, the Reserve Bank raised the rate by 0.25%, setting of a run that saw it rise to 3.85% by May 2023.

In a statement, Qantas said “the temporary spike in fares post-Covid reflected reductions in capacity to improve operational resilience following the challenging restart of the industry once borders opened”.

“These reductions coincided with a period of high demand and the imbalance pushed up fares across all airlines. At the same time, fuel prices increased by more than 60 per cent, driving fares higher again,” Qantas said.

Virgin was approached for comment.

Fels also noted that throughout 2022, rates of cancellations and flight disruptions soared to record highs, as airlines struggled to return to pre-Covid operations due in part to shortages of staff who had left the industry during the pandemic, Covid waves and strong demand.

In 2017-19, Qantas’ cancellation rate was 2%, which increased to 4.4% in 2022-23, Fels said, noting a similar increase in Virgin’s disruptions.

“Qantas’ service delivery returning from the pandemic shut down became so derided the term ‘Joyced’ (a reference to then CEO Alan Joyce) entered into popular Australian usage to ‘describe being severely inconvenienced at an airport by flight cancellations or luggage going astray’,” Fels said.

Fels also noted how the Albanese government’s controversial decision to reject Qatar Airways’ push to almost double its flights to Australia kept international air fares higher.

“Quite clearly it was acting in the interests of Qantas,” Fels said of the government.