http://www.guardian.co.uk/business/2008 ... ysbusiness
Cheap flights boom over, says BA chief as oil hits new high
· Fears in US over shortages sends price to $135 a barrel
· Budget airlines face fight for survival, Walsh warns
* Dan Milmo in Houston
* The Guardian,
* Friday May 23 2008
* Article history
Britain's leading airline boss declared the era of cheap flights over yesterday as the price of oil hit a record high for the third day running.
Willie Walsh, the boss of British Airways, said the soaring cost of oil allied to global economic uncertainty would force airlines to raise fares in a scramble for survival that will see many of them go bust.
After a day of heavy trading oil rose to $135 a barrel as fears over supply shortages in the US sparked more buying. A year ago a barrel of oil cost just $65 but the price has risen relentlessly, driven by demand from developing countries and speculation on the world markets.
The soaring cost of fuel is also having a painful impact on the wider economy and brought renewed calls yesterday for the government to scrap rises in duty planned for the autumn as motorists face increasingly steep increases in the cost of filling their tanks.
The AA said drivers would pay more than £110m more on fuel over this weekend's bank holiday than over the same period last year. Average petrol prices have risen to 112.5p a litre while diesel costs an average 124.2p.
A day after the world's biggest carrier, American Airlines, announced huge cuts in routes and jobs because of the rising oil price, Walsh said budget airlines would have to increase fares and add-on charges such as baggage check-in fees and that many unprofitable companies would simply go bust. "The industry has no future if it does not price in its costs."
Asked if cheap fares for customers who book flights far in advance will disappear, he said: "My view is yes," before issuing a warning to low cost carriers Ryanair and easyJet, who rely on low ticket prices to pack out their aircraft.
His prediction will mean the end of a golden era for consumers who have become used to cheap flights to cities all over the globe and which has revolutionised the travel industry by putting hitherto unheralded destinations such as Jerez and Tallinn on the tourist map.
"If these prices are not available it will not encourage people to take short trips," said Walsh.
He added that many airlines would not survive a life-threatening combination of expensive fuel and a drop-off in demand as passenger numbers decline due to expensive fares and dwindling consumer confidence.
"This is about whether airlines can survive. If you look at a lot of the low-cost carriers around Europe, a lot of them have not been able to make money when oil was $80 per barrel," he said.
Despite announcing record profits last year, BA is expected to lose money over the next two years as its bottom line is wiped out by the oil price. Walsh confirmed that, as well as raising its fares, BA will cut thousands of flights this winter as its drops its least profitable routes and grounds its oldest, most fuel-thirsty planes.
The BA chief executive also refused to rule out another hike in fuel surcharges, which are levied on customers to cover the rising cost of oil and already add £158 to the cost of long-haul return flights. "It could be [a rise in] fares, it could be surcharges. Or it could be a combination of both," he said.
Fuel accounts for around a third of airline budgets and its escalating price is forcing airlines to pass on the cost to consumers because they are running out of overheads to slash in their own businesses.
The cost of fuelling a transatlantic flight, the most profitable part of BA's business, has quadrupled since 2000 to $44,000 (£22,200).
EasyJet admitted this month that its costs had risen by £4 per customer due to higher fuel prices - an increase that it is struggling not to pass on in fare increases.
Budget airlines led by Ryanair and easyJet are mitigating the increase by charging higher fees for checking in bags and priority boarding passes. Their business models are predicated on packing their planes with passengers through very cheap fares and then generating extra profits through charging those customers for add-ons such as baggage check-ins and car hire deals.
Analysts have warned that high fuel costs spell the end of the cheap flights boom, which has taken Ryanair from a provincial carrier to the world's most profitable airline, but is now under threat due to fares pressure and falling disposable income.
"All we have done is factored in the oil price. We have not even factored in a consumer slowdown yet. The real problem is the price sensitive consumer. What happens to them when they push their prices up," said Andrew Fitchie, analyst at stockbroker Collins Stewart.
An easyJet spokesman said fares would be kept low in the short term because there were too many European budget carriers. However, many of those airlines would go bankrupt over the next year, allowing the likes of easyJet and Ryanair to raise fares in order to accommodate fuel costs.
