We’re heading towards the end of the summer here in the UK and we thought it would be a good time to take the temperature of the holiday market with a four-part series exploring how our travel patterns are changing - and what this might mean for hotel investors. You can catch up on the story so far here.
The cost of flights has taken off in 2023 with reduced capacity, higher labour costs, higher fuel costs and more aircraft leasing in a higher cost debt environment all contributing to rising prices, with some concerns that travellers will opt for staycations if family travel is not affordable.
Right now the popular tourist destinations seem to be riding the turbulence.
For example, according to data analyst specialist Cirium, the Spanish market is now largely back to where it was pre-pandemic in terms of capacity. For the July-to-September quarter, total scheduled flights from Spanish airports are down just 1 per cent from the same quarter in 2019.
Yet the recovery is not completely even. While Barcelona and Madrid are still lagging pre-Covid volumes, by contrast many of Spain’s popular beach markets are busier than they were before the pandemic, including Palma, Malaga, Ibiza, and the Canary Islands.These are locations largely unaffected by the decline in business traffic since the pandemic, while other destinations have been hit by the demise of low cost airlines or by flight reductions.
Similarly, The World Travel & Tourism Council reported in July that Portugal’s travel and tourism economy is expected to surpass the 2019 high of €40.1 billion this year.
Carrier fees stay high
All this despite noticeably higher carrier fares. According to a recent Financial Times analysis of data from Cirium, air fares have risen at more than twice the rate of inflation, as carriers cash in on the soaring demand for travel. Prices have also risen because many carriers have been slow in rebuilding their pre-pandemic flight schedules, in part because of a global shortage of aircraft.The comparatively restricted supply of seats has also helped prop up prices and prevented a glut of new capacity flooding the market and driving fares back down, and underlying costs have also risen, raising the baseline for profitability.
Crucially, rising interest rates are increasing the cost of debt and driving up aircraft-leasing rates, a significant factor as many carriers, including shorthaul value specialist EasyJet, lease more of their fleets now than pre-Covid, having completed sale-and-leaseback deals with lessors to raise capital during the pandemic.
Ryanair boss Michael O’Leary recently reflected: “Some lease rates are now 8 per cent -9 per cent.” These rates inflate daily operating costs and won’t diminish until rates fall.
Yet, travellers continue to fill the higher-priced seats, with statistics from around the world telling a remarkably similar story.
In the US, industry group Airlines for America estimates that a record 256.8 million passengers will fly in the June-August quarter, up 1 per cent over the 254.6 million passengers in the same period in 2019.
IATA points to increased traffic
Meanwhile, in its most recent data the International Air Transport Association (IATA) said that total traffic in May 2023 (measured in revenue passenger kilometres, RPKs) rose 39.1 per cent compared with May 2022. Globally, traffic is now at 96.1 per cent of May 2019 levels.
IATA also reported high levels of confidence among travellers for the peak Northern summer travel holiday season, with its survey of 4,700 travellers in 11 countries showing that 79 per cent were planning a trip in the June-August 2023 period.
Forward bookings data reveals the greatest growth in the Asia Pacific region (134.7 per cent); followed by the Middle East (42.9 per cent); Europe (39.9 per cent); Africa (36.4 per cent); Latin America (21.4 per cent) and North America (14.1 per cent).
“Expectations are high for this year’s peak Northern summer travel season. While some disruptions can be expected, there is a clear expectation that the ramping-up issues faced at some key hub airports in 2022 will have been resolved,” says Nick Careen, IATA’s Senior Vice President for Operations, Safety and Security, who also cautions over the impact of labour unrest, particularly in France.
In the meantime, price and wage increases have hit aviation like every other sector, with IATA forecasting an 8.1 per cent rise in operating costs this year despite a substantial fall in oil prices.
Costs remain high
Jet fuel costs are expected to average $98.50 per barrel in 2023 for a total fuel bill of $215 billion. That is cheaper than the $111.9 per barrel previously anticipated (December 2022) and the average cost of $135.60 experienced in 2022.
High crude oil prices were exaggerated for airlines as the premium paid to refine crude oil into jet fuel averaged more than 34 per cent for 2022—significantly above the long-run average. As a result, fuel was responsible for almost 30 per cent of total expenses and in 2023 will account for 28 per cent of average costs, still above the 24 per cent of 2019.
Non-fuel unit costs per available tonne kilometre (ATK) are expected to fall to 39 cents per ATK. That is -6.4 per cent compared to 2022 (41.7 cents/ATK) and marks a return to about pre-Covid levels.
IATA estimates that overall cost rises are likely to be around +8.1 per cent year-on-year but says that total airline industry net profits will reach $9.8 billion in 2023 (1.2 per cent net profit margin), which is more than double the previous forecast of $4.7 billion (December 2022) as some 4.35 billion people are expected to travel in 2023, which is closing in on the 4.54 billion who flew in 2019.
“Economic uncertainties have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs. But with airlines just making $2.25 per passenger on average, repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge,” reflects Willie Walsh, IATA’s Director General.
Currently, it seems as though controlling inflation will be key, especially as economic conditions in different countries are evolving at varying rates in different markets. An early or lower end to rate rises would be not just a welcome relief for the airlines but for hotel and accommodation owners too, who will be hoping that consumer resilience to higher prices is not stretched beyond summer 2023.
If you missed part one in our series, you can read it here