December 7, 2021

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It’s time for travellers to wave goodbye to cheap flights

The last time I flew was when I boarded a Ryanair flight back from Pisa to London on February 16. It was just before anxieties were beginning to rise about the number of coronavirus cases in Italy. Not for a moment did I think it would mark the close of an era. But now, just a few weeks later, I think that this is exactly what it marks: an abrupt end to 25 years of extraordinarily cheap air travel. It’s been a glorious time for travellers, but we are going to have to adjust to a new reality.

I say this despite that fact that Wizz Air – the Hungarian-based no-frills airline – announced last Saturday that it will recommence flights on May 1. It is planning a “phased return” of ten per cent of its fleet, with its CEO Jozsef Varadi predicting that it may be at 30 per cent by “the end of May or sometime in June” and that within five to six months it could be up to full capacity. 

Varadi thinks different airlines will recover at different rates and Wizz will be in the vanguard. I hope he is right, but such a quick bounce back seems to me to be extremely optimistic. Far more sober assessments came from two other major airlines this week. British Airways announced on Tuesday that it had reduced passenger capacity in April and May by 94 per cent, with plans for up to 12,000 redundancies. Its prediction is that that a full recovery will take several years. Meanwhile, Norwegian Air has decided to ground most of its flights until April 2021 – operating just seven aircraft in the meantime. Even by 2022, it says it expects to be flying only 120 aircraft, compared with 168 in 2019.

So, why will this mean an end to cheap air travel? I’m going to come to that. But first, it’s worth reflecting on just how cheap flying has become. That flight to Pisa in February cost £90 return (with cabin bags and priority boarding). Thirty years ago, it would have been £159 – the cheapest return fare that BA was charging on that route in 1990. And while BA then included a meal and checked baggage, the fare came with restrictions – you had to stay over a Saturday night, for example, or you would pay perhaps three times more.

Add inflation to the calculation and the real cost of the 1990 flight at today’s prices was about £360. My trip to Italy effectively cost only a quarter of what I would have had to pay back then.

Trips to Pisa were far more expensive 25 years ago – getty

The same is true for many other European fares. Also in 1990 – before adjusting for inflation – you would have had to pay £228 return from London to Naples, £188 to Rome, £142 to Barcelona and £125 to Nice (that one was with Dan Air – remember them?). Last February, you could have bought returns for less than £100 to all those destinations.

So why did flying become so much cheaper? Essentially, a mini miracle happened. In 1993, the EU deregulated the European airline industry, the old cosy commercial arrangements were broken up and new airlines like EasyJet, founded two years later, and a remodelled Ryanair, grabbed their opportunity. They had lots going for them. The internet was making the booking process much more efficient – they could strip out the costs of travel agent commissions and their own booking staff and also hire cabin crew more cheaply. They were clever too. They realised that new, more fuel-efficient aircraft cost less to run and were more reliable and – crucially – they could hugely reduce costs per flight by operating with faster turnarounds. In Europe this allowed up to three round trips for each aircraft each day – 50 per cent more than the traditional model. Ryanair also realised it could save huge amounts and improve turnaround times by operating to smaller regional airports rather than using the more congested and expensive main hubs. 

So they could easily undercut their old-fashioned inefficient rivals which had operated in a cosy, protected environment for decades and they were ruthless in doing so, especially as new computer programmes enabled them to cut fares to stimulate demand on slow-selling flights and raise them to maximise profit where demand was high.

A virtuous circle developed, fares dropped, more and more people were tempted to fly, airlines expanded rapidly and competed fiercely, regional airports prospered and, since about 2000, we have been able to get to hundreds of destinations around Europe extraordinarily cheaply. In 1990 we had had to save up for our flights. Now we could put them on credit card without even blinking. The long-haul market was also affected. Thirty years ago, the cheapest return to Boston was £416, Delhi was £519 and Sydney, £995 – high by today’s standards.

As we all know, there was plenty of turbulence along the way. As airlines competed ferociously on price, the low-cost carriers found more and more ways to reduce headline fares and levy additional charges for everything from baggage to seat selection. And not every fare was a bargain – prices on summer peak dates could be ten times higher than the cheapest November deals. Nevertheless, for 25 years flying has been far cheaper than ever before. 

So why will fares now go up now? The simple answer is that margins in the airline industry are incredibly tight. The hugely successful and profitable Ryanair, for example, made £880m in the year to last March. But that represented a profit per passenger of just £6.33 and it was based on filling 96 per cent of its seats. A significant drop in the number of passengers on each flight would make a big difference to the equation.

It makes heaps of cash, but Ryanair’s profit margins are still tight – getty

You could obviously try to put up fares to compensate. But the more you do – especially during a recession – the more you risk that virtuous circle turning into a vicious one, as potential passengers baulk at the higher prices and decide not to book. And airlines will also have to compensate for the fact that their most profitable clients, business passengers, will be far fewer in number. Companies are already fast adapting to using digital communication rather than flying their employees around the world. 

Some costs will be lower – cheaper oil means cheaper aviation fuel, for example. But all airlines will also have to repair the financial damage they have suffered and will continue to suffer over the coming months. They have racked up huge debts which will have to be paid back. Iata estimates that the sector will lose about £255bn in revenues this year – about half its income.

So two things are likely to happen. First we will have less choice both of carriers and destinations. Some airlines will go out of business and those that remain will focus on the most profitable routes where demand is strongest. Second, fares will go up – Iata estimates a 50 per cent increase overall.

The bullish Wizz Air kicks back against this, saying: “Fares will be crushed. Very low fares will stimulate the market and people will travel.” That may be so in the initial dash to win back customers. But the sums just don’t add up in the longer term.

Out of interest, I checked Ryanair’s fares for return flights to Pisa in mid February 2021 travelling at similar times to my own trip this year. That fare is £25 higher at £115. There were cheaper possibilities at around £70 return, but it’s not possible to compare those with what might have been available earlier this year. And even with my example, that price is likely to vary between now and next February. 

There is a little light on the horizon, however. Despite higher fares, air travel is likely to remain better value than it was before the low-cost boom. And the price of some holiday elements may well drop. As long as demand is depressed, hotel rooms, for instance, are likely to be significantly cheaper than they were before the pandemic. So while we may have to pay more for our flights, our nights should cost us less.

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