As part of a feature on travel and the economic downturn, Ian Taylor looks at how previous financial crises have affected the industry

Economic shocks

There have been two occasions when the annual number of UK air travellers has fallen:

In 1974 passenger numbers fell by 7.3% year on year after the oil-price shock of 1973 following the Arab-Israel War (the oil price quadrupled in a year). A worldwide recession followed. Passenger numbers did not recover for three years.

In 1991 passenger traffic fell by 6.7% amid recession and the first Gulf War.

In both cases, the combination of recession and an oil-price shock led to a major travel company failure – the country’s second biggest tour operator Clarksons collapsed in 1974 and International Leisure Group, also the number two in its time, failed in 1991.

The current crisis brought down XL Leisure – the UK’s third largest travel group – in September. However, the travel industry has proved remarkably resilient to most ‘external’ shocks.

In a report on Air Passenger Growth and Airport Capacity in 2003, the Civil Aviation Authority noted: “Shocks to air passenger traffic are largely transitory. The exception is the 1974 shock, which had a long-term impact on traffic growth…There was a permanent increase in fuel prices and hence airline costs.”

That reduced long-term industry growth rates from above 10% a year between 1960 and 1973 to about half that rate thereafter.

Could the current crisis have a similar effect? Growth in UK passenger numbers has stalled in the past two years, falling to about 2% a year.

Barriers to growth

The UK travel industry has suffered repeated economic shocks in its history, but has benefited from 16 years of continuous UK economic growth since 1992.

Travel industry growth rates have been hit on several occasions:

In 1967-68 a sterling crisis led to devaluation and a cut in the exchange rate of the pound from $2.80 to $2.40. Annual growth in passengers fell as a result to just over 3% in 1968 from an average of 12% over 1962-66.

By way of comparison, the devaluation of sterling against the dollar in the 1960s amounted to about 14%. The pound has fallen 25% against the dollar in recent weeks.

In 1979-1982 – the oil-price rise triggered by the Iran-Iraq War led into the UK’s worst recession since the war. But air passenger traffic fell only slightly in 1981 before recovering in 1982.

In 2001-2002 – UK air passenger numbers grew by only 0.5% in 2001, amid the fallout from September 11, before returning to 5% annual growth in 2002.

The price of oil has been a recurrent feature in previous downturns, but not the only one. Fuel remains relatively costly by historic standards despite the recent collapse in price brought by growing realisation that the world faces recession.

In the circumstances, the surprise might be that the price is at the level of early 2007 rather than of 2002/03 when it was closer to $20 a barrel.