Soaring fuel costs and taxes spell the end for cheap flights

The era of cheap holiday air fares is coming to an end as European airlines ramp up prices to cope with rising taxes and fuel costs, the International Air Transport Association (Iata) signalled yesterday.

Leisure air travel fell 3.5 per cent worldwide between November and March as cash-strapped passengers rejected fares that have soared as a result of the increasing cost of oil.

Europe suffered the biggest decline in traffic as tax increases in the UK and Germany added to the industry's price pressures.

Iata said that airlines had been forced to increase fares because the price of jet fuel had jumped by more than half in the past year. The association raised the prospect of a repeat of 2008 when fuel costs sent ticket prices soaring.

Brian Pearce, Iata's chief economist, said carriers were left with no choice but to ramp up fares. "If they have got a nice fat margin they can lower fares to stimulate demand, but when fuel prices are up by 50 per cent that's not possible," Mr Pearce said. He added that falling economy class sales were "a worrying trend".

Iata said UK airlines will have to make up for another 8 per cent of cost increases this year. The rising price of fuel accounts for 5 per cent and passenger duty hikes another 3 per cent.

Last month, Ryanair, the star financial performer of the budget airlines, said its fares would increase 12 per cent this year to cover an expected rise in its fuel bill, which rose 37 per cent to €1.2bn (£1.1bn) in the last financial year as average oil prices increased from $62 a barrel to $73. The oil price has since stayed steadily above $100 a barrel.

This week, Iata cut its forecast for global airline profit by more than half to $4bn (£2.4bn) because of the sharp hike in oil prices and economic problems which have suppressed activity.

The industry's profit margins will be squeezed to 0.7 per cent this year from 3.2 per cent last year, which was the strongest since the September 2001 attacks on the US.

Overall, growth in European traffic is expected to be the lowest worldwide at 3.9 per cent this year compared with 14.6 per cent in the Middle East and sturdy expansion in Africa and Asia Pacific. "They are certainly not being held back by any of the debt problems that we currently see many European economies being held back by," Mr Pearce said at Iata's annual meeting in Singapore.

European growth will be in business travel, which is holding up well as the growing global economy encourages companies to maintain spending on trips. Business traffic is growing at an annual rate of 6 per cent.

The shift of economic power to emerging markets from the developed economies sparked a rare row at Iata's three-day meeting. Gulf airlines, led by Qatar Airways, attacked European carriers and Canada for blocking access to their markets, while European airlines accused their Middle East rivals of taking hidden subsidies.

With profits under threat, taxes are also a burning issue for the airline industry.

The conference opened with a showdown between airlines and the European Union over an EU emissions trading plan that foreign governments say is a stealth tax, leading to warnings that China and others could retaliate.