Evidence is mounting that increased capacity has compromised the yield on holidays and flights this summer. Ian Taylor reports
Air fares this summer are “materially lower” than a year ago and pricing “continues to deteriorate as we move into the summer peak”, Ryanair chief executive Michael O’Leary acknowledged on Monday.
He was speaking after Ryanair reported a 46% fall in profits in first-quarter results for the three months to June, with average fares 15% down on the same period a year ago.
The fact that Easter fell partially in March this year will have had an impact on quarterly price comparisons. But O’Leary described the fall in fares as “somewhat surprising” given passenger demand “remains strong” for July to September.
He admitted consumer spending is “weaker than anticipated”, saying: “Pricing remains softer than we expected. We expected fares [this summer] to be flat to moderately up.”
Instead, he noted: “The pricing environment continues to deteriorate as we move into the summer peak.”
O’Leary told analysts that Ryanair’s half-year results to the end of September would be “totally dependent on close-in bookings and yields through August and September” and warned: “We expect fares to be materially lower than this time last summer.”
There was an associated warning for rival carriers, with O’Leary insisting: “We’ll continue to stimulate strong volume growth at the price of yields. If we have to maintain lower pricing to maintain growth, then so be it. We’re convinced we’ll be long-term winners.”
O’Leary’s surprise at the weakness in pricing was due to his repeated observation that European air traffic remains constrained owing to delays in aircraft deliveries and problems with the engines on many Airbus A320 neos requiring the aircraft be taken out of service for months at a time.
The Ryanair chief noted data from European air traffic management body Eurocontrol showed capacity in Europe in the six months to June was still 5% lower than in 2019.
But O’Leary himself warned of the softening in prices two months ago, declaring an end to the fare inflation of the post-pandemic period.
He noted than that demand for June “required more stimulation than last year” and said he was only “cautiously optimistic” that peak summer fares would be “flat to modestly ahead” of last summer, observing: “The weakness is on leisure routes. There is a lack of spending across most markets.”
Costs rising ahead of fares
The UK’s headline inflation rate had fallen to 2% in June, but this has yet to feed through into many of the costs paid by carriers and tour operators.
Ryanair reported staff costs rose 25% year on year in the quarter to June, well ahead of the 11% increase in flights. Airport and handling charges increased by 13%, and air traffic control charges 14%.
Of the airline’s major expenses, only fuel costs rose by less than the rate of expansion – increasing by 6%.
Ryanair still reported a quarterly profit of €360 million, somewhat better than the Lufthansa Group of airlines is due to report in half-year results next week.
Lufthansa issued a profit warning last week and announced the launch of “a comprehensive turnaround programme”, with a provisional half-year loss of €427 million compared to a €149 million profit last year.
The group noted “a decline in yields in all traffic regions” and warned: “It is becoming increasingly challenging for Lufthansa Airlines to break even for the full year.”
In the US, where airlines have never been as profitable as in the last two years, Delta Air Lines reported record revenue for the three months to June but a significant fall in profits.
Delta chief executive Ed Bastian noted a softening in economy class pricing in a sign that the post-pandemic boom in leisure air travel in the US may have plateaued.
Passenger revenue per seat was down 3% year on year during April to June despite a 10% rise in premium cabin revenue.
‘Pricing must remain attractive’
To what extent is the pressure on air fares reflected in the pricing of package holidays for the remaining summer season?
Anecdotally, smaller tour operators report a squeeze on pricing over recent months.
Unfortunately, we no longer have the benefit of GfK booking data to make sense of the overall UK market, but we should have a clearer picture following results from easyJet and easyJet Holidays this morning (July 24) and Tui next month.
Jet2 has already noted a softening in prices in full-year results to March announced on July 11.
The company reported “record passenger numbers, record revenue and record profitability”. But it described pricing growth this summer as only “moderate”, in contrast to last year when the average price of a Jet2holidays package rose 11%, and only enough to offset cost increases “in part”.
Jet2 reported package customer numbers up 7% this summer against a 12.3% increase in capacity overall and a 15% increase in Atol capacity
The airline’s current summer load factor was almost two percentage points down on the same time last year, with passengers “booking much closer to departure”.
In the circumstances, it noted: “Pricing must remain attractive.”
EasyJet was cautious on pricing back in May when it issued half-year results, with chief executive John Lundgren refusing to be drawn on fare expectations, saying it was “too early to say how this will play out [in] summer and the lates market”.
However, in a trading update today, he said: ”Our strong performance in the quarter has been driven by more customers choosing EasyJet for our unrivalled network of destinations and value for money. This result was achieved despite Easter falling into March this year, demonstrating the continued importance of travel and this means we remain on track to deliver another record-breaking summer, taking us a step closer to our medium term targets.”
But like Ryanair, EasyJet is operating about 8% more capacity this summer than last year and needs to fill it.