Taxes, aviation, fuel hikes and capacity - demand ratio are significant factors

Cheapflights.co.uk,  the online international flights and travel price deals comparison provider, has noted a continuing upward trend in air fares, which are moving towards pre-recession levels.

A year ago, Cheapflights anticipated that increased fuel prices and an equalling out of seat capacity and passenger demand would move air fares higher. These factors have indeed contributed to US air fares rising by 19% overall year-on-year to August 2010 for all destinations and for Europe alone, 27.6% (US Bureau of Labor Statistics).

Specifically in the UK, the Consumer Price Index (CPI) for UK air fares rose by a significant 23.1% year-on-year to August 2010. From July to August the figure rose 16.1% due to seasonal factors (UK Gov CPI). It is possible that the new, much higher four-tier Air Passenger Duty introduced by the UK Government last November may also have helped push the CPI air fare figures into double digits.

Also contributing to the rise has been a 13% increase in jet fuel prices over the past year, now at US$89.00 per barrel according to the latest monthly fuel monitor (IATA). In addition, excess capacity in the aviation industry ended in mid-2009 which has resulted in higher passenger load factors – in July 2010 these were 87.2% in North America and 84.5% in Europe, several percentage points above a year ago.

According to IATA, lower capacity and a jump in passenger demand from mid-2009 has meant that price increases recovered sharply from mid-2009. However, price increases are slowing in line with the current pace of the economic recovery.

A feature of the current market is that premium traffic sales have improved sharply. However, whilst they were up nearly 14% over July last year, they are still 8% down on the pre-recession peak. Economy seat sales by contrast are 3% above pre-recession levels with an 8.8% increase over July last year. This is despite consumer caution on the leisure front and may reflect business travellers down-grading to economy travel.

Chris Cuddy, Cheapflights Media’s CEO said: “There has been a significant 34% increase in searches on our UK and North American sites when comparing their combined traffic for the 12 months to August 2008 to the traffic in the recent recovery period from August 2009 to date.

“This reflects the 11% growth in global passenger demand recently predicted by IATA for 2010. It is also consistent with IATA’s recent three-fold increase in predicted global airline profits for 2010 in all areas except Europe. Even there, existing predictions for 2010 losses have been halved.

“The post-recession ‘bounce’ and catch-up of increased demand with capacity has driven the increase in fares and profitability over the past 12 months. However, in the US, the fares price index for the past two months has been falling and the situation there now indicates that growing seat capacity is offsetting passenger demand thus reducing the upward pressure on fares.

“In 2011, the picture for North America and Europe appears to be for a slower economic recovery rate, which may slow passenger demand, thus affecting load factors and carriers’ yields.”

Francesca Ecsery, Cheapflights Media’s Global Sales Director, added: “There are a number of external factors which can affect the outlook for air fares. For example, if jet fuel prices move significantly above the current US$89.00 per barrel, airlines will need to consider re-introducing fuel surcharges.

“The sharp further increase in Air Passenger Duty next November will raise costs for all travellers flying out of the UK, particularly on long-haul flights. In Germany, the new air fare tax will add costs for air passengers.

“Also the inclusion of aviation in the European Carbon Trading Scheme in 2012 will reportedly add nearly a billion dollars to airlines’ annual costs. These will undoubtedly be passed onto consumers.

“It remains to be seen whether these UK/European taxes will reduce traffic in the region and carriers will likely be cautious about increasing capacity without real evidence of a global economic recovery and passenger demand. However, on balance, the current outlook on both sides of the Atlantic is for prices to increase gradually as the slow economic recovery continues”.