Chancellor George Osborne gave the airline industry some good news last week when he announced plans to scrap air passenger duty (APD) for children under 12 from 1 May next year. The change came in Mr Osborne's Autumn Statement, and industry experts believe it paves the way for the complete abolition of air passenger duty for all customers in the future.
London-listed airlines welcomed the development with open arms. EasyJet (EZJ) shares rose 3 per cent following the news and Carolyn McCall – EasyJet's chief executive and an anti-APD champion – said she hoped to see total abolition of the tax. Her sentiments were echoed by International Consolidated Airlines' (IAG) boss Willie Walsh and Michael O'Leary of Ryanair (RYA). All three executives have long urged for the government to scrap air passenger duty to promote growth in the UK via cheap travel fares. But the government plans only to scrap the fee for children, equating to a saving of roughly £13.
It's not the first change made to air passenger duty this year. In March, when Mr Osborne revealed details of this year's Budget, he said he planned to simplify the tax system for long-haul flights – particularly those long-haul flights to "fast-growth" destinations including China, Brazil and Australia.
But some companies in the airline sector are riding high for reasons other than the changes made to APD. EasyJet recently reported a solid set of results. Revenue per seat rose 1.2 per cent last year - and nearly 2 per cent at constant currencies - to £63.31, even though the total number of European short-haul seats flown rose by 4.3 per cent. That meant easyJet posted its fourth consecutive year of record pre-tax profits, up by more than fifth to £581m. Chief executive Carolyn McCall said the company's resilience can be attributed to "discipline", both on spending and capacity plans. But easyJet, like some of its competitors, has also benefitted from the recent drop-off in the oil price. As a budget carrier which consumes an enormous amount of fuel, a significant portion of easyJet's operating costs are tied to aviation fuel. Competitive advantages, such as lower staff costs, are progressively negated for easyJet as fuel prices increase. But this pattern reverses as prices contract.
Ryanair shares have leapt in value, too. This was primarily on the back of a profit upgrade. But the influence of the Autumn Statement is clear as well. On 2 December Ryanair shares were changing hands for 893ȼ each. By the 5 December - following Mr Osborne's speech - that had risen to 967ȼ.
Last week's profit upgrade is the second time Ryanair has re-evaluated forecasts in the space of a month. Now, Ryanair expects post-tax profits to fall between €810m and €830m, up from the previously upgraded estimate of €750m-€770m. But rumours are swirling among City analysts that Ryanair is still erring on the side of caution with its latest forecasts in the hope of eventually beating them. In the first six months of the financial year, the budget airline reported a 9 per cent rise in revenues to €3.54bn, and pre-tax profits of €908m.
The Irish carrier said a 22 per cent rise in passenger numbers to 6.35m in November had motivated the change of heart, with earlier customer bookings and targeted sales drives encouraging last month's growth. Over the past year, Ryanair passenger numbers have risen 5 per cent to 85.4m and it expects more than 90m customers to have flown Ryanair by the year-end.
The recent results pay homage to Ryanair's 2013 strategy to improve its customer service and scrap a number of what it believed to be "unpopular" customer policies. It's allowed more carry-on baggage, allocated seating and cut certain charges. It's no wonder, then, that the market reacted well to news that Ryanair will lower its air fares to reflect the changes to APD.
