By Jon Sindreu

Budget travel isn't dead, but fliers should brace for fewer bargains. Results Monday from Ryanair, the industry's European bellwether, help show the direction of travel.

The Dublin-based company reported a pretax profit of EUR1.7 billion, or $1.8 billion, for the quarter ending September, down 3% from a year earlier.

The crux of the matter: a continued drop in average fares, which stood at EUR61 ($66), or 7% lower than in summer 2023. The previous quarter saw a 15% year-over-year fall.

Like most U.S. peers, Ryanair has been forced to cut prices. U.S. airfares have been in deflation since April of last year, official data show, and are 4.5% cheaper than they were right before the start of the pandemic.

Yet oil prices are 30% higher, while staff shortages have forced airlines to boost pay. Production stoppages of more fuel-efficient aircraft and the skyrocketing costs of spare parts have also made operating and maintaining fleets far more expensive.

The result is that low-cost carriers, which operate on thin margins, are in dire straits: Most are worth a fraction of what they were at the start of 2020. Southwest Airlines is amid a historic change in course, and Spirit Airlines is fighting for survival. Ryanair has fared better, but unit costs are still 10% higher than before Covid-19.

Some of the worst has passed. Pay rises are mostly done and oil prices have given airlines a reprieve over the past six months. Southwest management has struck a truce with activist investor Elliott Investment Management, and a potentially revived merger with Frontier Airlines could be the ideal solution for Spirit.

Nonetheless, the industry isn't going back to a low-cost world anytime soon: Tensions in the Middle East cloud the outlook for crude, and the aerospace supply chain is far from back to normal.

That makes it crucial for carriers to start pushing through higher prices. Encouragingly, Ryanair Chief Executive Michael O'Leary said Monday that the decline in airfares in the final quarter of the year should be between 0% and 5%, and fares should increase again next summer.

That makes sense. Contrary to popular belief, demand for low-cost travel is very much alive, as showcased by the fact that low-cost airlines have much higher revenues than they did in 2019. Ryanair flew 9% more passengers last quarter, and sales rose 3%.

It suggests that the market would likely support higher fares if carriers are able to fully roll back the glut of seats in the U.S. and Europe.

With slightly higher prices, budget airlines could find a post-Covid sweet spot. If that happens Ryanair, which has increased its cost advantage relative to rivals, is certain to lead the way.

This analysis comes from the Journal's Heard on the Street team. Subscribe to their free daily afternoon newsletter here.

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(END) Dow Jones Newswires

November 04, 2024 10:00 ET (15:00 GMT)

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