Airlines’ blood pressure is rising with the oil price

Are the days of budget air travel ending?

British Airways’ short-haul routes between London and Italy have been fairly heavily subscribed by my family this month. Last week, my eldest son was delayed overnight in Rome by the storms at Heathrow. As I write, my daughter is bound for Turin out of Gatwick and, later in the week, half the family flies out to Bologna. Among middle class, British, aspirant-eurotrash families, I imagine this is not an untypical travel programme – fuelled by relatively competitive fares, we’re increasingly using Europe in the same way as Americans travel within the US.

But there’s a feeling that it can’t go on. The virtuous market, in which cut-price airlines have put competitive pressure on the flag-carriers, is threatened by bureaucratic, regulatory challenges and rising costs. BA, which also operates under the shadow of industrial action, announced this week that it expects its fuel bill for the year to March 2005 to rocket by &£225m, to &£1.1bn. Oil prices have taken off to unprecedented levels, spoiling the fragile recovery in airline operating margins – if we thought that Brent crude smashing its record highs and rising by 35 per cent since the beginning of the year was bad news for the motorist, it’s even worse for the air traveller. Fuel ranks second only to the troublesome labour-force as BA’s most significant overhead, accounting for some 12 per cent of total costs.

In May, BA was the first European airline to introduce a &£2.50 per flight surcharge on flights from the UK. Somewhat relieved that BA had broken ranks first, other airlines such as Air France-KLM and Virgin Atlantic followed suit. This week, BA announced that it was raising this surcharge to &£6 per flight leg on long-haul routes. The short-haul surcharge remains the same, but it’s a matter of some speculation how long we can escape further fuel-cost effects in a Europe that we have become accustomed to moving around as though we are making inter-state, rather than foreign, journeys. We have grown used to complaining about high train fares, compared with air travel – and the taxi fare to Luton airport is likely to cost more than your holiday flight. But, under their cost pressures, the airlines can’t keep it up.

On the regulatory front, the signs are there already that prices will be forced up across the industry by those who can’t hold the line at current levels. We may treat Italy like a southern state of a federal Europe – at least, those of us who aren’t Little Englander isolationists do – but the Italians aren’t amused. The Italian government has an over-riding responsibility to prevent its state airline, Alitalia, from slipping into bankruptcy, as Swissair did in 2001. The surest sign that prices are to be forced up is an Italian demand to the European Commission (EC) that its competitors desist from undercutting Alitalia on long-haul routes – a move that has infuriated BA.

Germany’s Lufthansa and BA have already been vexed by the state aid deployed to prop up ailing Alitalia, but it’s difficult to see how they can prevail over the European Union’s bilateral treaties, aimed at protecting national carriers from price wars on their principal routes. The regulations are not often enforced, but with Alitalia’s back to the wall it’s likely that it will be protected on its flagship, non-stop route from Rome to New York. And there may even be some secret relief at BA and Lufthansa that someone else is making the running in increasing fares.

If oil and the fear of bankruptcy are the factors driving fare rises, the strain of operating a business at the top of the airline industry is beginning to tell. One can detect it partially in BA’s fury that Alitalia should have pulled a flanker by complaining to the EC. Elsewhere, there have been some alarming responses to the clear difficulties. Jorgen Lindegaard, chief executive of Scandinavian airline SAS, recently joined an online chatroom, where he laid into critics of his company, which had a sorry recent record of cancelled flights and fare increases.

This intervention provided the cut-price – and highly reliable – Ryanair with a gold-plated opportunity to claim that no one should take advice from SAS on how to run an airline and that Lindegaard “must be living in a dream world” if he thought fare increases were the way to the future. But the real question must be what effect the relentless upward pressure on costs will have on the budget operators such as easyJet and Ryanair. They’re not immune from the price of oil – and they should beware a wounded flag-carrier such as BA that is returning to profitability. The pressure is on for price rises across this industry and the post-summer competition is going to get brutal.

George Pitcher is a partner at communications management consultancy Luther Pendragon


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