Tucked away in Darling’s pre-budget report yesterday was something that may be impacting the share prices of UK and Irish airlines today — all of which, with the exception of the illiquid Aer Lingus, are down in early morning trading.
The government is increasing the air passenger duty — a tax aimed at lining the Treasury’s coffers mitigating the environmental impact from commercial flights. They’ve also expanded the number of travel bands for flights (measured by miles flown) from two to four, and scrapped plans to institute a per plane charge — something that would have made more sense from an environmental standpoint.
From the report:
Think a £1 pound increase on short-haul flights is small-change? Think again.
Transport analyst Andrew Fitchie at Collins Stewart estimates the impact like this:
Set against average fares for easyJet and Ryanair of around £46 and £35 respectively, the increases don’t sound like much; probably around a 1% yield hit if we assume around 40% of their traffic is UK departing. However 1% off yields represents as much as 30% off our annualised pre-tax profit forecast for easyJet to Sept ’10 and 10% off Ryanair to March ’10. In the case of BA it’s less easy to predict the impact because the price-elasticity is less in the premium cabin, nonetheless it could represent between 10-20% of annualised pre-tax to March ’10.
Goodbody analyst John Goode is slightly more sanguine, but he also estimates the measure will knock 1 per cent off yields at Ryanair — resulting in fiscal-year 2010 net profits falling 3.8 per cent to €385m from €400m (every 1 per cent fall in yields knocks €25m off profits).
As airlines lower their ticket prices to win passengers in the midst of a recession, this will have an even bigger impact — especially for the low-cost carriers, whose customers, as Fitchie notes above, tend to be more sensitive to price increases than those who pack the first- and business-class cabins of BA et al.
Nonetheless, this is a strange effect given Darling’s plan is meant to stimulate British businesses, of which airlines are arguably one of the worst off, still suffering from the lingering legacy of record oil prices and a steepening consumer downturn. We note that Ryanair is already threatening to “enter discussions” with smaller UK regional airports about the viability of flights post the APD-increase.
Related links:
Flying forces – FT Alphaville
UK flight taxes to rise as reform dropped – FT
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