Turbulent times in the airline industry

Passengers won’t be the only ones checking on the location of emergency exits if the current stream of bad news in the airline industry continues. Shareholders could start to look for them too – because the outlook is distinctly bumpy.

Plans by Ryanair to take over smaller Irish rival Aer Lingus have been grounded by Europe’s competition authorities. It may appeal the judgment but rival Flybe, which stood to gain some of Aer Lingus’ slots at Gatwick, will still press ahead with job losses, cutting around 10% of its UK workforce as it fights to get back into the black.

Meanwhile, Easyjet is steeling itself for another fight with founder and former chairman Sir Stelios Haji-Ioannou after the entrepreneur, whose family owns 36% of the airline’s stock, said he’d vote against proposals to invest in new Airbus aircraft.

Separately, International Airlines Group, parent of British Airways and Iberia, plans almost 4,000 redundancies at the Spanish airline.

As if all this news wasn’t enough for a single week, Heathrow airport said it will raise landing charges well above the rate of inflation to raise £3bn to pay for new investment.

It all adds up to a dire financial climate for the airline industry, still fighting a losing battle for an end to Air Passenger Duty, the tax levied in Britain on all passengers flying out of UK airports.

A new report by the accountants PwC, commissioned by BA, Easyjet, Ryanair and Virgin Atlantic, says the UK economy would be £16bn better off within two years if APD were scrapped – because more foreign visitors would come to the UK and business activity would pick up.

The British government isn’t buying that argument and nor will it.

This despite the fact APD acts as a disincentive for many who would otherwise fly from the UK. Currently, for instance, a family of four will save hundreds of pounds flying short-haul to mainland European hub airports and transiting to long-haul carriers from there to destinations such as Australia and the Far East.

Scrapping APD would cost the UK Government around £3-4bn in tax revenue straightaway –  though PwC  says more tax revenue would result from increased business activity.

That’s an accounting aspiration rather than an economic reality.  Scrapping APD would be a huge financial risk. More than that, getting rid of it would also send out the message the UK is not serious about tackling carbon dioxide emissions, of which airlines account for about 5%. Scrapping APD would result in more flights and more emissions. A round trip flight from Europe to New York results in carbon dioxide emissions of around 2-3 tons per person and there would be many more such flights if APD were ditched.

On its own, emissions targets would probably be enough to tie the UK’s Government’s hands. The multi-billion pound loss to Treasury coffers, however, swings it decisively. APD is here to stay.