The "cheap flights" era is over

The penny seems to be dropping, albeit slowly and late. Oil is a finite resource: as it gets scarcer, the price increases. The car industry is future-proofing itself by developing electric cars. There are no electric planes for the passenger routes to Belfast, Boston or Bangkok. Aviation is a sunset industry.

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Willie Walsh, the chief executive of the company formed by the merger of British Airways and Spain's Iberia, said consumers must get used to higher ticket prices. Arguing there had been a "structural shift in the price of oil", Mr Walsh said:

"The industry is going to have to price in $120 oil. As a percentage of our cost base, it's 32%. For the low-cost guys it's more like 50%. It is such a big part of an airline's costs that fares will have to go up."

IAG yesterday said it expected its total fuel bill for the year to reach €5.2bn (£4.6bn) after a first half that saw a near-35% increase in fuel costs to €2.44bn. The company, which is 50% hedged for the next 12 months at about $93 per barrel against a current spot price of around $117, managed to recover 50% of the first-half increase in fuel costs through "revenue initiatives". However, IAG said such recovery "becomes progressively harder through the year".

Despite these headwinds, IAG reversed last time's half-year losses of €419m to post a pre-tax profit of €39m on total revenues up 17.9pc to €7.77bn. Passenger revenue growth of 18.6% was flattered by the disruption caused last time by the Icelandic volcano and BA strikes. Underlying growth was closer to 11% to 12%.

Boosted by ongoing recovery in first and business class traffic, strong cost controls and a 7.2% increase in yields – broadly revenue per seat – Mr Walsh said he expected "significant growth in operating profit this year". Analysts are expecting €400m pre-tax profits this year. Mr Walsh said premium traffic was "just getting back" to its 1997 peak, before the credit crunch, with the tie-up with American Airlines reaping dividends on the transatlantic routes, where traffic rose 16%. Describing London as a "strong market", Mr Walsh said:

"We are doing better than Air France and Lufthansa. Our performance on the transatlantic is clearly better than the competition."

He said he had seen "no evidence" of any recent slowdown on the North American routes caused by the US debt crisis but confirmed a €90m-€100m hit from the Japanese tsunami and political upheaval in North Africa and the Middle East.

Mr Walsh added IAG was interested in the possible purchase of Portugal's TAP airline, which the new government is considering privatising:

"You should expect us to look at what's on offer. But we've not had any discussions or done any analysis of it yet."

The shares rose 4.7 to 237.3p but analysts were cautious about potential turbulence ahead. Charles Stanley analyst Douglas McNeill said:

"We remain sceptical that through-the-cycle profitability is improving and continue to rate the stock a hold with some downside risk."

Telegraph 30th Jul 2011