British Airways to Increase Fares Amid Rising Fuel Costs
British Airways will raise fares in an effort to recover most of a €2bn (£1.7bn) increase in fuel costs this year, its parent company, International Airlines Group (IAG), has announced. The group cautioned that the ongoing conflict in Iran will negatively impact profits.
IAG stated that its annual fuel expenditure is now projected to reach approximately €9bn, up from the previous forecast of €7.1bn. The company noted that 70% of its fuel supply is hedged, which has provided some protection against the full effects of the conflict since its onset.
The group expects to recoup about 60% of the additional €2bn fuel costs through a combination of revenue and cost management strategies, with fare increases primarily applied to British Airways rather than its sister airlines.
"Unfortunately, for example, BA that is a more premium brand, they are going to have a higher pass-through, compared, for example, with Vueling," said Luis Gallego, chief executive of IAG.
Recovering the €1.2bn portion of the increased costs would translate to an estimated 8% rise in British Airways fares, based on the airline's projected 2025 revenues.
IAG's Response to Fuel Price Uncertainty
Gallego emphasized that the group, which also owns Aer Lingus, Iberia, Vueling, and Level, is actively managing the uncertainty caused by rising fuel prices by adjusting yields, costs, and capacity accordingly.
"The impact of the higher fuel price will inevitably lead to lower profit this year than we originally anticipated," Gallego stated.
Speaking during the release of IAG's first-quarter trading results, Gallego reported no current issues with fuel availability in the group's main markets and expressed confidence in fuel supply throughout the peak summer travel period.
"Asia was a concern but is now building up reserves – so we expect to fly everything we have in the schedule for the summer," he added.
Fuel Shortage Concerns and Capacity Management
Concerns about potential fuel shortages have been heightened by UK airlines' ability to cancel flights without risking valuable airport slots. However, British Airways' chief executive, Sean Doyle, indicated that the airline's strategy focuses on reallocating capacity from less active markets, such as the Middle East, to destinations with higher demand.
"[BA has] an advantageous resilience if fuel shortages did affect the industry, with its own inventory and supplies," Doyle said.
Nicholas Cadbury, IAG’s chief financial officer, noted that British Airways is better positioned than many competitors due to significant investments in UK depots and fleet, including direct fuel supplies from ports and refineries.
Financial Impact and Market Context
Prior to this warning, analysts had forecast IAG to achieve approximately €5.2bn in operating profits for the year, surpassing the previous record €5bn operating profit.
Global oil prices have surged amid the ongoing conflict, rising from $72 per barrel before the war to just above $100 per barrel as of Friday.
Data from Cirium released earlier in the week indicates a reduction of flights across the industry. While London Heathrow, British Airways’ primary hub, has seen a net loss of only 111 flights from schedules, concerns remain that jet fuel shortages could lead to further cancellations during the summer. UK airlines were informed over the weekend that they could cancel more flights without losing airport slots.
International agencies have warned that if the Middle East conflict persists, fuel supply issues could worsen. Analysts at Goldman Sachs highlighted in a Monday research note that the UK is the most vulnerable in Europe due to being the largest net importer of jet fuel.
IAG stated:
"If the current conflict continues to restrict flows of both crude oil and jet fuel from the Middle East, there is the potential for supplies of jet fuel to be restricted on a global basis." The group also reported experiencing "strong demand across most of our markets" but noted "softer demand" in the eastern Mediterranean.
First-Quarter Financial Results
For the three months ending in March, IAG reported a pre-tax profit of €422m, representing a 77% increase compared to the same period the previous year. Revenue rose by 1.9% to €7.2bn.
