Budget airlines: dead?

As oil companies reap the benefits of $130 per barrel crude, budget airlines are in crisis and facing extinction. Some airlines are already having trouble filling the tank: at least a dozen carriers have collapsed in the past six months.

MoneyWeek reports that the fuel bill for the global airline industry will rise to $50 billion this year. With consumers facing dwindling personal finances, European no-frills carriers will have to give up their promises of cheap flights to the continent. This raises serious questions over the business models of two of the dominant players in the European budget airline market: Ryanair and easyJet. For every $1 rise in the price of crude above $65 per barrel, an airline such as Ryanair takes on 14 million euros in operating costs. 

Credit Suisse does not believe that any airline can be profitable in the medium term: British Airways, Air France-KLM and Qantas can trade their way out of trouble by raising fares, but that approach is anathema to Ryanair and easyJet. Budget airlines, with thinner profit margins than long-haul carriers such as BA, will trust in Darwinism, keeping their low fares in the hope that smaller players throw in the towel. Southwest Airlines has survived three recessions despite its low-fare strategy. Yet permanently higher oil prices will make it harder to maintain the gap between their prices and those of their larger rivals.