Cheap Fuel Is Making European Aviation More Competitive

Not all airlines love cheap fuel. Of course if they had a monopoly on flights, low oil prices would be great. The problem is everyone else.

The European aviation market remains fragmented. This is despite the fact that any airline based in a European Union member country can fly anywhere they want. Although there have been high-profile collapses in the past, many countries still have at least one carrier.

For the consumer, this is probably a good thing. The fact that fuel is cheap means that there are more airlines competing for passengers, keeping prices low.

This isn’t great news for airlines, especially the bigger ones who might prefer slightly higher prices and less competition. Those in a sound financial position are also able to hedge far in advance and don’t tend to see as much of a benefit when the oil price sinks.

Conversely, an airline like Monarch was able to stay afloat a couple of years ago, precisely because it wasn’t tied to fuel hedges.

What makes the current environment doubly difficult is degree of uncertainty in Europe. The ongoing Brexit negotiations as well as key elections in places like France and Germany are making things harder for airlines.

Even Ryanair, which has grown to dominate the industry over the last twenty years is wary.

Part of the problem is that airlines have been pulling capacity out of places like Turkey, Tunisia and Egypt — destinations that are popular for sun-starved Europeans – and have put their jets elsewhere with Spain and Portugal proving popular.

“There’s been a lot of stimulation in the market there’s been a lot of discounting in the form of promotions. I would expect that to continue. We did see a lot of capacity come into the European market out of the likes of the Red Sea and North Africa last summer, as a result of terror events a lot of those markets closed up, I don’t think that capacity will disappear this year,” said Ryanair’s Chief Financial Officer Neil Sorahan.

EasyJet is in a similar bind.

“I think while there is capacity in the market and that is largely because of low fuel,” said Chief Executive Carolyn McCall on the day of the airline’s first quarter results.

Rising prices

There had been some suggestions that rising oil prices would hit airlines this summer, but that no longer seems to be the case.

A barrel of Brent Crude oil will set you back around $56 today. This is almost double the price that it was a year ago but still a lot cheaper than it had been over the last five years.

“[W]ith fuel starting to rise, weaker carriers don’t have the ability to hedge their fuel, so while they were the first to benefit from fuel dropping, [they] will be the first to feel the pinch as prices start to go up,” Sorahan said.

EasyJet’s McCall agrees. “Despite it being quite a tough operation climate, everybody’s still hedged on fuel,” she said.

“I think as those hedges come off as oil starts to rise, I mean, it’s not rising dramatically but there’s certainly been an uplift in the oil price, that begins to get a bit more painful for a lot of carriers. And as that happens, I think capacity does start becoming a little bit tighter and it is something we can all control.”

A Difficult year ahead

At the moment Ryanair looks to have a stronger hand than EasyJet. It’s lower cost base means that it has more flexibility when it comes to pricing.

Easyjet is also feeling the heat from its founder and largest shareholder Sir Stelios Haji-Ioannou over a planned fleet expansion.

As Strickland says: “They’ve got a harder year ahead then they’ve had for sometime.”