Oil price throws airlines into spin

EasyJet's first-half losses have more than trebled amid soaring fuel costs. Does this mean a turbulent future for budget flights?

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Last Updated: 31 Aug 2010

It certainly doesn’t look like the cruising is going to get any smoother. Oil passed the $122 a barrel mark for the first time on Tuesday, and Goldman Sachs has said it could well pass $200 in as little as six months. For the airlines this will be about as welcome as a flock of geese in the corporate air intakes.

EasyJet’s losses hit £57.5m for the six months to the end of March, including £9.1m of costs from its purchase of GB Airways. A year ago they were £17.1m. The price of jet fuel has risen 35% in the past three months and is now 80% higher than last year. And it is set to increase by at least £45m between April and September. EasyJet predicts its fuel bill will also rise by an extra £2.5m for every $10 rise in the price of a barrel of oil. Such numbers make the attractive ‘£1-a-flight’ offers increasingly hard to pilot.

Of course, soaring oil costs are likely to hit the UK economy hard in general, especially as it arrives on top of the credit crunch. And it’s hard to imagine it easing. Partly there’s the rising oil demand – caused by the increasingly prosperous and fuel-hungry Chinese and Indian economies. But there are also problems in production. Shell’s Nigerian output is down by 164,000 barrels a day, following attacks on its pipelines by militant groups. There have also been attacks by Turks on Iraqi exports. Meanwhile the president of Indonesia, Susilo Bambang Yudhoyono, has predicted his country could quit Opec, with the ominous warning that ‘our wells are running dry’.

Despite the cloudy outlook, easyJet is holding its nose high. CEO Andrew Harrison has argued that its competitors will suffer more, claiming his airline will emerge ‘even stronger, reflecting the combination of our business model, our cost advantage, our new fuel-efficient fleet and the strength of our network’. Harrison predicts that weaker airlines will start to disappear in the next year or two [er, hello? They already have], and claims that easyJet’s modern fleet gives it an edge. ‘A quarter of Europe's short-haul aircraft are at least 15 years old, so they burn 20% more fuel than our planes,’ he said.

But it’s not just the budget airlines that are suffering. BA has also seen a dip in its shareprice in the wake of the fuel price hike. And the airline has admitted passengers are deserting it following the Heathrow Terminal 5 fiasco. BA said passenger numbers fell 7% last month after the disastrous launch of its new £4.3bn base. Analysts said the airline has lost around 300,000 customers since March.

It will be interesting to see how well the airlines cope with the continued buffeting. With the twin pressures of increased costs, and the ongoing credit crisis hitting customers’ pockets, it may not just be the weaker airlines that have to endure the bumpy landings. Indeed, it could be a case of added pressure on the undercarriage all round.

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