Domestic airfares hit a five year high in the first three months of the year, as airlines cut back on flights to Western Australia.
Ratings agency Moody's said industry data shows an index measuring discount economy fares hit a five year high in the March quarter, and business and restricted economy fares were at even longer historical highs.
Prices have risen partly because airlines have cut the frequency of flights, and the size of aircraft, flying to Western Australia, which has a softer economy than the eastern states.
"The airlines' strategy reflects a contraction in capital investment in the mining and resources sector, much of which is based in Western Australia, over the past three years," Moody's said.
Qantas and Virgin Australia should get a revenue boost from higher airfares, as domestic operations are their largest divisions.
"The growth in domestic airfares and the likely moderate growth in traffic volumes, based on our observations of the first six months of fiscal 2017, will drive an improvement in the airlines' revenue in the second half of fiscal 2017," Moody's said.
In the 2015/16 financial year, domestic operations generated around 53 per cent of Qantas' passenger earnings, and all of Virgin Australia's passenger earnings, due to its international losses, the agency said.
But Moody's also said a rapid increase in capacity in the international travel market is challenging international fares for Qantas and Virgin Australia.
