Even as demand for overseas travel is shrinking because of high oil prices, a strong dollar, and high interest rates, reservation rates for the July–August peak season at domestic low-cost carriers (LCCs) are instead rising from a year earlier or at least holding steady. On the surface, it looks like air travel demand is recovering, but a closer look suggests it is an illusion created by a reduction in total available seats and aggressive early promotions to pull in as much demand as possible. LCCs are already signaling large losses starting in the second quarter.
According to the airline industry on the 11th, the reservation rate for LCC A's Japan routes for July–August had risen more than 15% from the same period last year as of the 9th. The reservation rate refers to the percentage of seats supplied during the period that have already been sold. A representative at LCC B said, "Not only Japan but Southeast Asia and Greater China routes also have reservation rates for this summer peak season that are similar to last year," and a representative at LCC C also said, "Overall reservation rates are not changing much."
This runs counter to what the field is saying lately: that overseas travel demand is falling because of high oil prices, a strong dollar, and high interest rates. In fact, Modetour Network said recently that its total number of outbound travelers in May was 69,832, a sharp drop of 30.2% from a year earlier. With no sign the exchange rate will calm down, a preference for domestic travel is emerging. The airline industry has been concerned, saying, "We've held on so far with bookings made before the Iran war, but the war's impact could fully kick in starting in the peak season."
Still, analysts say the fact that LCCs are keeping peak-season reservation rates at or above last year's level is an illusion created by last-ditch measures. The biggest factor is that supply—the denominator for the reservation rate—has decreased. LCCs are cutting and suspending large numbers of flights to reduce fixed costs. Jin Air plans to cut 123 round trips across 19 routes, including Southeast Asia and Guam, in July. Eastar Jet Co. will reduce about 250 round trips over the three months from May to July.
An LCC representative said, "We reduced many flights, such as cutting routes that used to operate two to three times a week down to once," adding, "In that case, even if demand is the same as before, the reservation rate inevitably goes up."
LCC promotions are also having an effect. Jeju Air set the base fare as low as 1,000 won to mark the launch of its new Incheon–Kobe route, and lowered fares on the Incheon–Fukuoka route to 3,000 won. Even after adding fuel surcharges and taxes, that allows travelers to buy round-trip tickets for the low 100,000-won range.
Trinity Airways launched its winter promotion early that day. The centerpiece is up to 17% off on international routes and additional discount coupons of up to 40,000 won for travel from Sept. 1 to Mar. 27 next year.
A representative in the LCC industry said, "Because promotions are tied to the reservation rate, if the rate drops even a little, discounted tickets are released right away," adding, "Demand is unstable and the (pace of reservation rate increases) is slow, so route managers are selling early at low prices to lift reservation rates."
In the end, even if reservation rates rise, it will be hard to reduce losses for LCCs. According to FnGuide, among listed LCCs, Jeju Air (-59.3 billion won), Trinity Airways (-151 billion won), and Jin Air (-73.3 billion won) are expected to post large losses in the second quarter. An LCC representative said, "Fuel surcharges, which had been soaring, are calming somewhat, but with high interest rates coupled with a strong dollar, it is difficult for LCCs to hold out."