Will the escalating fuel cost drive capacity cuts for Summer 2019?

Fuel prices have risen by 50% since June 2017 and as airlines fuel hedges unwind, they will need to pass as much of this increased cost on to customers in the form of higher prices as possible.  However, to do this they will need to reduce supply relative  to demand, which will inevitably lead to capacity cuts.

 

As UK holiday makers know, airlines don’t price their product like most companies.

Rather than pricing each ticket based on how much it costs to fly to Majorca, with perhaps a built-in profit margin, airlines set fares based on supply and demand. It’s why a Saturday day flight is more expensive than on a Wednesday 6am departure, even though the operating cost is the same. It’s just a matter of increasing demand for less popular slots by reducing price, as long as the net result at least covers the operating cost.

Therefore, when fuel prices are low as they were in 2017, airlines look to drive the utilisation of their fixed aircraft assets by introducing more mid-week and early morning flights boosting capacity. Also, aggressively expanding airlines like Jet2 massively increased capacity with the introduction of new bases such as Stanstead.

However, when fuel prices reverse its obviously harder to remove this capacity, but if it’s not removed then its impossible for airlines to match supply and demand in order to pass on the cost increase on to a customers in the form of higher prices.

This is doubly true in a UK market place facing demand damping factors such as good UK weather, a weak pound and fears of political and business disruption because of Brexit.

The easiest solution is obviously for one or more airlines to be forced out of the market, but with the benefit of the removal of Monarch already banked, who is realistically at threat of collapse?

 

Ryanair are openly talking up the prospects of Norwegian Airways and Alitalia failing this winter, but neither of these would remove much short haul capacity from the UK market, although players like Rynair might switch capacity out of the UK to the Nordics to fill the massive gap created in the market there.

 

The logical step for UK low cost airlines is therefore to reduce capacity by scraping marginal routes or moving aircraft from short flight duration routes like Mainland Spain, to longer flight sectors such as Turkey and the Canaries. Adding one Turkey flight will utilise an aircraft for the same time as two Alicante flights, in effect halving the number of seats to be sold, assuming of course they can get enough yield from the Turkey flight to balance the books.

 

There is also an argument that airlines like Jet2 are effectively reducing the amount of flights seats in the market by selling more as package holidays. I’m not however convinced that this hold much water, as in my opinion Jet2 are just swapping capacity out of the OTA dynamic packaging market into their inhouse tour operation.

 

Ironically, the simplest route to boost demand may be for the low cost airlines to finally recognise the volume of seats filled on aircraft by the UK OTA’s and do deals to reduce their high API fees (£30 per booking) in exchange for preferential promotion within the OTA’s sites.

 

But I would suggest that wouldn’t I !!!

 

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