With the Rise of Fuel Prices, are Cheap Flights Coming to an End?By Sofía Hanna | Tue, 07/12/2022 - 08:06
Cheap flights have been one of the main supports for the aviation industry since the COVID-19 quarantines that continue disrupting the sector. But those flights are only viable when fuel prices remain within a limited range. As fuel prices rise, low-cost airlines might have to increase their prices, leaving behind the disruptive “cheap flight” model.
“We must take actions that will allow us to make profits at a time when prices in the industry have no ceiling,” said Michael O’Leary, Chief Executive, Ryanair, the Irish airline known for its low-cost flights in the EU. The increase in fuel prices over the past months, coupled with environmental charges and the UK’s exit from the EU (Brexit), has led airlines in the EU to increase their tariffs. Fares are expected to be between 7 percent and 9 percent higher than in the summer of 2019, before the COVID-19 pandemic.
In an interview with the Financial Times, O’Leary said that “so far this year, traffic is recovering strongly, as [Ryanair] carried 97.1 million passengers, up from 27.5 million a year earlier thanks to the lifting of pandemic restrictions.” The airline expects to return to reasonable profitability this fiscal year as it reported annual losses of €355 million (US$356.7 million) on its past fiscal year.
Low-cost airlines in Latin America and Mexico can also be affected by this trend. Between January and May 2022, the price of turbosine, the most commonly used fuel in aviation, grew faster in the Latin American region than in other parts of the world. The volatility of jet fuel prices will be one of the main challenges for the airline industry in the short term, especially for Latin America, given that the price of jet fuel reached US$4.2 per gallon globally, while in Latin America it reached the highest value at US$4.4 per gallon, according to the Platts global index of S&P Global, as of June 7, 2022.
Mexico’s low-cost airlines Viva Aerobus and Volaris have reported the best results throughout the pandemic. For example, during 1Q22, “Total Operating Income of Viva Aerobus increased 104 percent to MX$5.3 billion (US$206 million) reflecting higher revenues units per passenger, the recovery of the load factor and the growth of capacity,” as previously reported by MBN. However, the International Air Transport Association (IATA) expects for the price hike for turbosine to remain in place.