Fuel costs could end cheap flight era

· £16 a bag on Ryanair as airlines add surcharges
· Soaring oil prices bring fears of more bankruptcies
Plane landing
A plane comes into land at Heathrow Airport. Photograph: Matt Cardy/Getty Images

British travellers already thinking twice about flying to Europe this summer as the falling value of the pound cuts into their travel budget received more bad news yesterday with indications that the era of cheap flights may be drawing to an end.

Soaring fuel costs have put airlines under financial pressure which, analysts say, will inevitably be passed on to passengers through increased ticket prices, fuel surcharges and baggage check-in fees. The warnings follow a wave of airline bankruptcies in the UK and the US, and crippling oil price rises which have seen the cost of fuelling a transatlantic flight quadruple since 2000 to $44,000 (£22,100). The pressure on the airlines has been most acute this year as the global oil price rose from $80 a barrel to nearly $120.

Ryanair became the latest airline to pass that pain on to customers yesterday when it raised the cost of putting bags in the hold and checking in at airports. Passengers on Europe's largest budget carrier will have to pay £16 a bag and £8 to use a check-in desk on return journeys from Monday.

Fuel accounts for a quarter of airline budgets and the resulting financial squeeze has triggered warnings that major carriers could go to the wall or be forced to merge with rivals to survive.

For Britons holidaying in Europe this summer, the extra cost of flying comes on top of a slump in the pound against the euro. The pound has fallen by 17 % since last summer - from €1.47 to €1.22 last week.

Some reports suggest that tour operators are also moving to levy extra charges on holidays to recoup losses caused by the fall in the pound. At least 19 operators have applied to the Association of British Travel Agents to add a charge of up to 10% to holidays already booked. Late-notice fees can be added as long as they are imposed more than 30 days before departure.

Yesterday Ryanair attempted to play down its latest charge increases, the second time it has raised baggage costs this year, as part of an ongoing drive against luggage. But analysts say the airline has hiked up such charges to cover the rising cost of fuel, which is expected to account for nearly half its costs next year.

"Their earnings are very adversely affected by the fuel price, so they need to do everything they possibly can to alleviate that cost pressure," said Andrew Lobbenberg, an analyst at ABN Amro. Long-haul carriers such as British Airways levy fuel surcharges to cover rising fuel costs, but low-cost airlines refuse to impose them, instead preferring to recoup costs through add-on charges for checking in, in-flight food and car rental deals.

Ryanair said its charges hike would help keep fares low by making airplanes lighter, resulting in less fuel being consumed, and lowering baggage handling costs. But industry experts said higher bag check-in costs are inevitable if the cost of oil stays around its current level.

John Strickland, an aviation consultant, said: "Budget airlines will push harder and harder to increase add-on revenues. There is all the more impetus to do it in a toughening oil price environment."

Ryanair and low-cost rival easyJet will try to leave fares untouched, because cheap tickets are the key part of a no-frills business model that uses bargain fares to pack passengers on to airplanes and then wring profits from them with add-ons.

"They cannot afford to raise fares. It would break their model," said Strickland. "Occupancy would fall and they will not make enough money to cover increased fuel costs." Ryanair has already warned that profits could fall by as much as 50% this year due to the fuel situation, while easyJet shares were hit recently when it said it would miss its full-year profit targets if fuel stayed at the current price.

The Ryanair hike came as another airline serving the UK market went bust over the weekend. Eos, carrying business passengers between London and New York, slipped into bankruptcy. High fuel costs and depressed economies in Europe and the US have caused airline bankruptcies on both sides of the Atlantic in 2008, including three budget carriers in the US since March.

The threat to the industry is at its most serious since the aftermath of September 11, analysts have warned. The global airline industry is barely profitable, with a return on sales of around 1%. Just 13 airlines in the world recorded a profit margin of more than 10% last year, including Ryanair and easyJet, when the average oil price hovered below $80 a barrel.

Analysts say BA's profits will be nearly wiped out if oil stays around the $120 mark over the next year. BA has admitted its fuel bill will rise to £2.5bn this year, forcing it to warn of lower than expected profits.

Extra costs per return journey


Bag check-in £10

Priority boarding pass £10 - £15


Bag check-in £16

Priority boarding £8

Check in for musical instrument or sports equipment £50


Bag check-in £9.98

Pre-assigned seating £10

Check in for sports equipment £40

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