Airlines face dual threat

The downgrading of the official terror threat from ‘severe’ to ‘substantial’ may make no difference to airport security ahead of the biggest holiday getaway so far this summer, but it was about the only good news in the past week.

Forget the excitement about the stock market upturn. Share prices were high at the point we went into this mess. Why should a bounce in them necessarily signal anything substantial?

The underlying signs remain bad, and anyone who does not think so should check the work of economists Barry Eichengreen and Kevin O’Rourke, who compare today’s global recession with that of 1929/30 and find discomforting parallels. The H1N1 virus – swine flu – will not help, regardless of the fact that much of what appears in the media is drivel.

The crisis is acute for carriers. Ryanair’s 14% cut in capacity at Stansted this winter – that is the year-on-year reduction, not the 40% Michael O’Leary talks of – is one symptom. British Airways’ (BA) move to lay hands on £600 million in cash is another. BA staff just lost the bank guarantees of their pensions as a result.

The recession is driving change, but longer-term pressures are also at work. Nature charity WWF-UK launched a campaign to persuade major companies to cut one in five business flights this week to combat climate change. Marks and Spencer and Vodafone are among those signed up.

It is precisely the collapse in premium travel that is hurting BA. For now, that is producing bargains for leisure travellers. Overcapacity means “criminal” low prices, in the words of a BA executive. But that may change if the recession proves W- rather than V-shaped. Then there really will be no return to business as before. Airlines are already operating at record losses.

If BA cuts frequencies and downsizes its business cabin – even if it charges full whack on the remaining seats – what does that mean for leisure fares that, until recently, were ‘subsidised’ by premium traffic and are now priced at a loss? And what might it mean with rising Air Passenger Duty and the costs of emissions trading to come?

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