Aviation News Online

So, what would you do?

The past decade or so has taught us all that anything can happen. The global economy is supposed to be volatile; but it is being driven forward by consumer spending which if you look closely, is being driven almost entirely by credit. As this is happening, there is a return of 100%+ mortgages as house prices rise rapidly in most areas of the US and Europe, even though in the background credit defaults are growing rapidly. Gas prices remain low but Russia is backing anti-fracking groups in North America and Europe to help reverse this trend. Oil prices remain stable and increased drilling in North America should keep it this way, although any repeat of the 1980s tanker war in the Straits of Hormuz would send the oil price up fast (given that 20% of all oil passes through here). There are warning signs that traffic through the straits is coming under increasing attack. Then there is the continued unwinding of the political map following the 2008 global recession and the Arab Spring. In times of economic strife countries generally turn protectionist, which has led to war many times in the past. Protectionism and an amount of isolationism is an attack on globalisation. The driver of globalisation is transportation and in the 21st century the main driver is aviation. And so it is interesting that no politician world over has had the gumption to try and attack aviation directly by mentioning any review of open skies agreements. This might have been the next step for any government with protectionist leanings and as such in 2017 it is worth looking out for any mention (that is all it will be) of a review of open skies agreements as this will be the first tentative step toward a very dark place for us all.

Last week also showed that it is too soon to be pinning hopes on the revival of the Iranian market as sanctions can be brought back at any time – the French banks have been wise to hold off but does this mean that lessors should also hold back?

Against this backdrop, the mighty Ryanair is dropping its prices by a huge 17% (and paying the price for the same). But who is it fighting? Look across Ryanair’s competitive landscape and you will soon discover that it is not other airlines, it is simply fighting to get people to travel. Ryanair has been very cleaver to deflect the reality in many ways. Most statements have leaned towards the reductions being a price war that it can both fight, handle and win. And that is true save for the underlying reason for the price reductions – competition is slowly giving way to a straight fight to get passengers into the air. This is partly due to the huge fall-away in tourist travel to Turkey, Tunisia Egypt and France and the reduction in UK outbound traffic last August, which seems to be continuing. Ryanair has deployed aircraft out of the markets affected by terrorist action towards Spain, Portugal and Italy but we have as yet not seen much of an overall increase in passenger numbers to these thee destinations – people are not diverting their holidays, they are holidaying at home.

One would expect LCCs to always be hit hardest and first by any tightening of the belt by consumers. To be blunt, most customers would choose full service airlines with more baggage allowance if they had the disposable income to do so. But, as discussed above, consumer spending and living on credit comes at a dangerous time for the global economy. If Ryanair is a barometer for the aviation industry, then should we be getting worried?

Keep a look out to see if Ryanair management are falling into a trap. As yield falls, Ryanair will start attacking ancillary revenue to drill out additional income from baggage allowances, which will further widen the product gap with other airlines at a time when Ryanair should be looking to continue its highly-successful drive to match the offering of easyJet, IAG, Jet2 and others. Ryanair’s great weakness has always been baggage restrictions and in its deployment to the holiday hotspots of the Mediterranean, the airline needs to ensure that baggage costs are not a turn-off and it also needs to have a full package holiday offering like Jet2, which is far broader and more dynamic company. Those booking the flight, hotel and transfers can then provide the margin to allow for the usual holiday baggage without additional costs, thus increasing business. Time will tell, but we must wonder why Ryanair yield is falling rapidly when the likes of Wizz is not seeing the same trend (yet perhaps).

Date: February 9, 2017

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