Wednesday, September 28, 2022
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Airline industry: rising costs make it harder to regain altitude

Passengers endure check-in chaos and cancellations. Yet the aviation industry insists it is on course for recovery. Rolls-Royce has flagged an uptick in demand for new large aircraft. Willie Walsh, boss of industry body Iata, has forecast a return to industry-wide profitability next year. It is, he claims, a time for optimism.

That message has not been lost on workers, including those at IAG — which Walsh ran until recently. At its British Airways subsidiary, unions have secured a “vastly improved” pay deal, averting a strike by check-in staff.

Across the industry, Iata expects a 7.9 per cent rise in the wage bill — the industry’s second biggest cost — this year. This is nearly twice the forecast 4.3 per cent increase in job numbers. Fuel costs are an even bigger headache. Assuming the price of Brent crude averages $101 per barrel this year, Iata calculates fuel will account for about a quarter of the industry’s costs, up from 19 per cent in 2021.

Hedging softens the blow. Ryanair, for instance, locked in an equivalent price of $65 per barrel for most of this year’s fuel needs. It has been a resilient performer, with low costs and a strong balance sheet. Its shares — trading in line with their historic average on a price/earnings multiple of 12 — are down by 5 per cent since February 24. That is a quarter the decline of the S&P Global 1200 airlines index.

But in the medium term, even discounter Ryanair expects higher oil prices, together with environmental charges, to push up average fares up by at least a quarter to €50. Confidence about passengers’ willingness to prioritise holidays if they have to tighten their belts must wither. They have done so in past recessions, but that was against a backdrop of declining real air travel costs.

As airport queues demonstrate, the lifting of Covid-19 restrictions has unleashed pent-up demand. But that could soon peter out in harsh economic conditions. So could hopes of a rapid return to profitability.

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