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18-03-2016-Warnings from the RBA's Luci Ellis: CommSec's Craig James

Craig James | 18 March 2016-PROPERTY OBSERVER

Warnings from the RBA's Luci Ellis: CommSec's Craig James

Warnings from the RBA's Luci Ellis: CommSec's Craig James

GUEST OBSERVER

Airfares: In smoothed terms, discount fares fell by 7.0 percent over the year to March. But business class airfares rose at a smoothed 7.4 percent annual rate with “restricted economy” fares up by 4.5 percent.

The airfares data provides insights on the airlines sector and insights on consumer spending.

What does it all mean?

There are still good deals to be had with discount airfares. Latest data shows that discount fares in March were 13 percent down on a year ago – or down seven percent if you smooth out the bumps that can occur in the monthly series. However business class and restricted economy airfares are higher, not lower than a year ago.

Over the past two years business class airfares have been lifting at a near 10 percent annual rate with restricted economy airfares rising at a 6.6 percent annual rate.

The lift in all airfares except discount fares as well as lower jet fuel prices and modest wage growth highlights the positive operating conditions that currently exist for airlines.

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For budding air travellers there continues to be value in shopping around for the best deals. In real (inflation adjusted) terms, discount airfares are only 5 percent above the lowest levels recorded in the 22-year history of the series.

The Head of the Reserve Bank’s Financial Stability Department, Luci Ellis, has delivered a deep and thoughtful speech covering a range of topics associated by financial market cycles. In the speech Luci Ellis said that she wasn’t concerned by ‘doom and gloom’ talk, specifically: “people who shout ‘bubble’ every time asset prices rise. Read it here.

If it gives a few other people pause and makes them open their eyes to the real risks, it is not such a bad thing. I would rather that, than if everyone were egging the boom on.”

There were some subtle warnings in the speech for property investors as well as those who are tempted to take on too much debt. The comments seem to suggest that the Reserve Bank still remains conflicted about the role of monetary policy in boom/bust events.

What do the figures show?

Airfares

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) reports that business class airfares rose by 0.1 percent in March to stand 8.1 percent higher than a year ago, slightly down from the fastest growth in 10 months. In smoothed terms, business class airfares are up 7.4 percent on the year, the fastest growth pace in 12 months.

“Restricted economy” airfares rose by 0.1 percent in March after falling by 1.6 per cent in February. Restricted economy airfares are up 5.7 percent on a year ago. In smoothed terms restricted economy fares are up 4.5 percent over the year. Airfares have been rising at a 6.6 percent average annual pace for the past two years.

Discount airfares fell by 6.6 percent in March after rising by 7.5 percent in February. Discount fares are 13.0 percent lower than a year ago. In smoothed terms, discount airfares are down 7.0 percent on a year ago, close to the biggest annual decline recorded in the past 40 months.

In real terms, discount airfares are only 4.7 percent above the lowest levels recorded.

What is the importance of the economic data?

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) “provides economic analysis, research and statistics on infrastructure, transport and regional development issues to inform Australian Government policy development and wider community understanding.” The airfares data is useful in gauging inflation trends and providing insights on the aviation sector.

What are the implications for interest rates and investors?

Low discount airfares merely highlight that Aussie consumers are saving on some purchases, allowing them to spend more in other areas. More specifically while housing has become less affordable, consumers continue to rack up savings on cars, petrol, travel, food and clothing, freeing up dollars to be spent on buying or renting homes.

The operating environment for airlines remains broadly favourable, but recent increases in oil prices and the Aussie dollar needs to be watched carefully.

Craig James is the chief economist at CommSec