Airline ticket prices are through the roof. In July, international air travel prices soared 53.3% in France compared to the same period last year. On domestic flights, the increase is 28.2%, according to INSEE figures.
Main culprit: the increase in the price of oil, and therefore of kerosene. So much so that Ryanair boss Michael O’Leary announced on Thursday the end of tickets (without luggage) at 9.99 euros, or even 99 cents. Incidentally, he also indicated that the average price of his tickets would go from 40 to 50 euros.
“Customers will switch to low-cost”
Ryanair is not an isolated case. All airlines have increased their fares in recent months. But some suffer more than others from rising oil prices. And contrary to what one might think, the low-cost ones will probably not be the most penalized by the rise in costs. The low-cost airline model could even be the big winner of the inflationary period:
“Certainly the price of the low-cost ticket has risen 20% but it will only be 60 euros, instead of 50,” he adds. And if the increases applied by traditional companies are lower in proportion, the difference in costs for the passenger, in absolute value, is usually more noticeable. Therefore, “I think there will be a substitution effect: customers will switch to low cost,” predicts Emmanuel Combe.
The economist bets above all on a strengthening of the “ultra low cost” companies, and in particular Ryanair. Especially since the Irish company has one of the most efficient fuel hedges, guaranteeing prices around $65 a barrel for 80% of its consumption until March 2023.
The ultra low cost, a model already reinforced by the Covid
The Irish company was already considered one of the big winners of the Covid crisis. “Ryanair, with extremely low costs, was necessarily the best equipped to come out of the crisis”, emphasizes Emmanuel Combe. Before recalling that “for the same distance in Europe, Ryanair is capable of transporting a passenger at 3 cents per kilometer, compared to 5 cents for a medium-cost carrier like EasyJet and 9 cents for a traditional company.”
Not to mention that Ryanair has “essentially a variable cost structure” while “traditional airlines have much higher fixed costs.” This allowed the Irish low cost to limit losses during the pandemic.
The Irish Airline Ryanair returned to profit after its staggered first quarter, boosted by increased traffic, posting a positive result of €170m after tax versus a net loss of €273m a year earlier. Traffic multiplied by more than five in one year, up to 45.5 million passengers transported.
Lastly, ultra-low-cost companies have the advantage of only making medium-haul flights, mainly aimed at tourist customers who have returned en masse to airports this summer, after two years of Covid. Instead, the traditional business model relies heavily on the very lucrative business clientele struggling to get back on planes since the pandemic and the rise of remote work.
Source: BFM TV
