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Dilemma for airlines between swallowing the rising cost fuel or alienating customers with price hikes

by Rachel Robson

Transport firms have been getting in the neck lately as soaring oil prices put the squeeze on heavy fuel users. ‘If oil stays at about $115 a barrel for the next year, there is barely an airline in the world that will make a profit,’ says The Guardian’s Nils Pratley about the continued pressure airlines are facing from rising fuel costs. ‘Aviation fuel is such a large proportion of operating costs (25% at easyJet, a little more at Ryanair and a little less at British Airways) that no airline can hope to pass on the full costs to customers without emptying the planes of half the passengers,’ he adds.

Still, if airlines really can’t pass on the cost hikes to passengers, they are not going to stop trying, reckons The Independent’s Jeremy Warner, who says ticket prices will likely see ‘steep increases’ over the next six months. ‘I hope you have already paid for this summer’s airline tickets, for, the way things are going, the age of cheap air travel may be a thing of the past,’ Warner ominously claims. ‘As demand falls,’ he adds, ‘there will also be widespread cuts in capacity.’

Get on the bus

Pratley goes on to highlight that it is not only airlines that are under pressure, but bus and rail companies are also struggling, sending their shares plunging. ‘Arriva’s shares have fallen 20% since January, National Express, and Firstgroup by a third and Go-Ahead by 40%,’ he says. However, he points out that the rising cost of fuel is not affecting these companies to the same degree as airlines. ‘Fuel, typically, is about 5% of their costs – and it should be possible to push some of the increase on to customers.’

He goes on to say that the companies themselves appear confident.

Meanwhile, Arriva has reported that earnings per share increased substantially. However, as Pratley points out, nobody is biting: ‘The idea seems to be that the effects of a slower economy will seep into bus and train travel and that public policy, especially free travel on buses for pensioners, is unhelpful.’ He goes on to say that common sense suggests that life would have to become ‘very bleak’ before we ‘can’t afford to take the bus’ and concludes that there is still ‘a world of difference between airlines and bus and train companies.’