The golden age of cheap European flights was good while it lasted
The margin squeeze will be worse for budget airlines, which start out with less room to cut costs
Coming down the runway for Europe’s travellers: fewer flights at higher prices. Airlines are trying to contain the damage wrought on their profits by persistently high fuel prices. While many are talking about cost cuts, passengers will share the burden too.
Budget airlines face the toughest task. Low-cost champion Ryanair on Monday outlined potential trims it hopes will ease the impact of a €2bn rise in its fuel bill in its next financial year. Full-service carriers aren’t immune, though. Lufthansa, busy integrating Italian carrier ITA as well as taking on a large minority holding in Portugal’s TAP, on Tuesday lowered the high end of its full-year profit forecast. Its fuel costs have risen by a fifth, even with financial hedges in place.
As well as high oil prices, airlines are also suffering from a reduction in refining capacity from the Middle East on top of that already lost from sanctions on Russia. Jet fuel in the region has traded above $1,200 a tonne for the past three months compared with about $800 before the US attacked Iran in February, making it costly to hedge next year’s needs — and risky, should prices fall.
The margin squeeze will be worse for budget airlines, which start out with less room to cut costs. Fuel will soak up 44 per cent of Ryanair’s revenue next year, according to analysts polled by Visible Alpha, up from 37 per cent this year. For British Airways owner IAG and for Lufthansa, on the other hand, fuel is expected to be between a quarter and a fifth, unchanged from this year.
Nor can low-cost carriers rely on wealthier premium travellers, who seem strangely tolerant of rising prices; Lufthansa’s premium services helped it to an 8 per cent rise in revenue. Capacity cuts are an obvious place to hunker down. But if fuel prices stay roughly where they are, Ryanair would need a 16 per cent jump in revenue next year to fully offset its extra costs, estimate Barclays analysts.
That’s a painful rise for its customers when the Irish airline’s current average one-way fare is €56. Prices at the budget end have recently been increasing by “mid single digits”, according to Ryanair boss Michael O’Leary, who expects them to rise much more as the industry heads into winter, literally and metaphorically. The only consolation is that budget passengers had it so good for so long.