Unprecedented rain of millions. This is how the summer of some of the main airlines in Europe and the United States could be summarized. The announcements of record profits in a third quarter follow one after another these days: Ryanair, IAG, Lufthansa, Air France-KLM, United, Delta... Never before have they earned so much money between July and September and it seems that the final stretch The year will also bring joy to the finances of companies that still carry voluminous backpacks of debt incurred during the pandemic. In each of the results presentations it is stated that flight reservations and prices have no brakes at the moment.
And here arises an issue that has caught the attention of the European Commission and consumer associations. While high-speed rail transport gains users and becomes cheaper as a result of greater competition, flying is today much more expensive than in 2019, when a record number of air passengers was reached. Up to 30% according to Brussels calculations.
Not even Ryanair, the leading airline in Europe by number of travelers and a low-cost banner, is free from rising fares. With passenger numbers expected to be at their highest, the group announced before the summer that it would increase its fares by around 10%. Although it always maintains that its prices remain “the cheapest on the market”, it has put an end to the era of ultra-cheap tickets. The company has beaten profits until September, as reported this week. It earned 2,180 million euros in the first half, 59% more than in the same period last year. In the summer it would amount to 1,511 million, which has led it to approve its first dividend in years. They are followed by IAG (1,230 million profits), Lufthansa (1,192 million) and Air France-KLM (931 million). EasyJet, which presents its results on November 28, has also reported an unparalleled operating profit.
The price increase explains only part of these extraordinary results, although it is the most striking. Even more so if one takes into account that, while rates are no longer as low as before, customer service has not improved in the same way, according to user organizations. After the covid crisis, in 2022 flight prices skyrocketed in Europe and inflation has continued in 2023 until August, when international travel tickets became cheaper compared to a year ago -see graph-, according to data of Eurostat. For Eurocontrol, the moderation of the increase seen in recent months is due to the base effect, since the increase was extraordinarily strong last year, as stated in its latest analysis.
“The passenger is tolerating paying a very high price but there are more reasons behind these record profits,” says Joan Tarradellas, professor of Finance at EADA and specialist in the airline sector. The price of fuel, the airlines' main argument to begin the price increase in 2022, has relaxed, Tarradellas continues. Although it has risen somewhat in September, it remains below what it was a few months ago and the companies have also anticipated this with broad coverage, which allows them to avoid a large part of the latest increases. This is the main fixed cost, and its weight for these companies is now somewhat lighter.
Personnel costs have also increased, but they have been able to be absorbed by a calculated strategy. “Most airlines have increased their capacity in existing destinations; more or less the same routes with more frequencies, which is cheaper than opening new destinations,” says the EADA professor. Added to this is an explosion of wealthy travelers who want to travel in business and first class, which are much more profitable. Lufthansa mentions it with some astonishment in its financial report for the last quarter. There is not enough first class supply to cover all demand, so some companies have already considered boosting this service. “For Lufthansa, for example, costs have decreased by 1%, while sales have increased by 9%,” highlights Tarradellas. Result: a profit of 1,192 million euros.
There has also been some convergence in the business model between flag airlines and low cost airlines, at least in the short and medium haul. “Airlines have adapted to the situation by seeking greater efficiencies in their operation, as well as promoting the low-cost model of à la carte fares, which allows prices to be adjusted to customer needs,” comments Pere Suau-Sánchez, professor at the UOC and Crandfield University. The airline concentration process and the shortage of new aircraft to renew and expand fleets are also pushing prices up.
Europe is monitoring the situation, as Transport Commissioner Adina Valean announced this week in the Financial Times. The Commission confirms that they are “analyzing in detail the recent increase in airfares to better understand the industry dynamics that have led to these prices and whether these would be a long-term trend.” They point out, however, that free competition and pricing has made flights cheaper in the last 30 years – decades ago it was a means of transport only suitable for wealthy people. But they want to analyze the recent process and its impact on connectivity in Europe.
The airlines insist that there is no mystery. Prices are set “by the mechanism of supply and demand,” emphasizes Javier Gándara, president of ALA, the association that brings together airlines operating in Spain. “More than 163 million passengers have flown this summer in our country, 1.2% more than in 2019, therefore prices are not affecting air activity,” he maintains. Gándara emphasizes that 1,513 destinations have been served in the thirteen airports with the most traffic, 1.4% more than in the equivalent period of 2019. “Air transport is competitive and we have connectivity that we had not seen to date,” he continues. to respond to the fears of the European Commission.
Be that as it may, the immediate trend does not suggest a reduction in prices in the short term. The decline in unemployment levels is offsetting the rise in rates and the inflation of fixed household expenses, which leaves budget for whims such as leisure trips. “The airlines already know that the last quarter of the year will be spectacular because they have a large part of the reservations made; The pressure of excessive demand above capacity will continue,” Tarradellas emphasizes. Aena has also anticipated that this exercise will reach the highest number of passengers in its history. Good news for these companies, some with a balance sheet in which 90% or 95% is debt.
Profits in the sector thus seem to enter a consolidation phase, so there are already those who put on the table that perhaps it is a good time to introduce environmental taxes that the pandemic crisis stopped. Another increase in price in sight.
