How will Budget Airlines Compete As Oil Price Rises?

With the soaring oil prices over the passed 12 months, and higher fuel bills for the majority, how are budget airlines going to compete, let alone survive in the uncertainty of the future?

Europe's biggest budget airline Ryanair, carrying 49m passengers annually, announced today that it could make an annual loss of 60m euros. Ryanair's fuel bill now represents almost 50% of its operating costs, compared with 36% last year. Shares fell by 22% on the news, and competitors BA and EasyJet were down 5% and 8% respectively. EasyJet, have also announced that their profits for the year could be half of expectations.

Whilst Ryanair are shouting that they wont be increasing fares or adding a fuel surcharge, industry experts have suggested that average fares will rise this and next year by over 10%, the number of flights and seats will be reduced and even some airlines will end up in the aeroplane graveyard that was once a distant memory. We have already seen two airlines meet this demise this year, in the shape of low-cost airline Oasis Air, flying from London to Hong Kong, and low-cost business only airline Silverjet.

Airlines have anounced that they will be reducing the capacity available over the next year, so will this have a positive environmental impact?

According to DEFRA research the average short-haul flight is 500km, with CO2 emissions for that flight of approximately 65kg. If the airlines reduce the number of flights and seats, etc in a uniform and efficient way, the three mentioned above would reduce the total number of seats by approximately 7.5m, and CO2 emissions by 500 000 tonnes.

In the airline industry the price demand ratio is, for every 10% increase in prices, a typical 6.5% fall in passenger numbers is experienced.