An interest rate hike. Effect on Lo-Co's?

[Buster the Bear]

As Britain seems to be funded via debt currently, what effect will an interest rate rise or few have on the travel industry, especially as the Lo-co's have come of age in a society that is happy with huge mortgages and credit card debts?

"I'll sling it on the mortgage" brigade are rather rife within UK society, what happens when the interest rate goes up, can they all survive?

Britain's entry into the Euro might be thier only blessing as interest rates have to be harmonised?

This is not a "Gloom and doom" post, but one to debate:-

[HOODED]

Good point well presented Buster! Glad Jet2 owns all it's aircraft and those canny Yorkshire folk don't believe in overstreching themselves. How do you rekon the Orange boys will do at your local hunting ground? Could be interesting times ahead!

------------------------------------------------------------------------------------It's dificult to soar with eagles when you work for turkeys!

[U/S President]

I don’t think Buster was referring to the airlines’ debts, but rather to the debts of their would be passengers.

I think Buster’s point was that the low-cost airlines have turned short-haul flying into a product that competes for consumers’ disposable income in a way the full-service airline’s products never did. Given that much of this so called ‘disposable’ income is based on credit card borrowing, personal loans and 100% mortgages, the worry would be that, if interest rates took a hike, low-cost airlines would suffer disproportionately as consumers cut out the non-essentials (e.g. mocha-laté-frapaccinnos and those cheap weekends away to Pau).

Fortunately for Jet2, it is true that Yorkshire (plus Scotland obviously) are the two areas of the Britain with “rather more traditional attitudes towards saving” (Financial Services Consumer Panel report (http://www.fs-cp.org.uk/pdf/consumer_research_gb_report_spring_03.pdf)).

[lightbluetouchpaper]

During economic downturns people don’t stop spending, they just feel less good about it. There is an argument that even people earning very good incomes become more bargain conscious – a phenomenon that LoCos should be well placed to take advantage of.

[HOODED]

U/S President, you misunderstood my point. If people stop flying due to a squeeze on their disposable income LoCo's who have leased ac will be hit harder if they have the lease costs to pay. Owned ac could simply fly less whilst leased ac need to fly lots to make themselves pay. You could of course return a number of ac to the lessors but are the lease agreements that flexable?
Jet2 should be better placed as you point out due to the local populous being slightly more careful with their money, but who knows maybe the first thing they'll cut is their cheap trips to Prague rather than their pint of Tetleys! But then again the cost of beer thanks to El Presidente and his chancelor may force them over there!

[In trim]

I agree with lightbluetouchpaper......if there was a major downturn in the amount of travel then it would impact on everyone. However, a slight rise in interest rates will make people more bargain-concious and this would tend to impact 'traditional' airlines more than locos, possibly with many 'traditional' passengers being tempted to try locos for the first time?

[HZ123]

Clear where you are coming from but the likes of BA / BMI will suffer further as will other EU national carriers and it may be that LC's are still for the time being better placed to cut costs. Easys 319's with 156 seats stand to make them a very good profit surpassing that presently. BA is still describing business as falling far worse than our most pessimistic estimates.

[Stick Flying]

Hooded,
I would have thought the opposite arguement would apply with lease versus owned. In an economiv downturn a leased aircraft can be returned as leases mature.

But I woulddn't suggest parking up a multi-million pound investment despite what you paid for it. You will still have to pay storage fees, engineering support (you cant just leave it idle), not to mention having the purchase costs tied up.

Jet2 may do well if Yorkshire does well. But that could oh so be their downfall if the screws tighten in Emmerdale. I think easyJet have a balanced market to choose from (be that good or bad) and are definately moving towards European bases which given the position of the UK economy might just be a sound investment.

Lets face it, an interest rate rise will effect all.

[KAT TOO]

With Greedy Gordon needing more (of our) cash to fund `tony's` skools'n'ospitall's. then the leaked doubling of pax tax will have a have larger impact on locos than full service airlines.

When you take a family of four on hols the extra 80.00 is a big jump, will people still jump for the seat filler deals that all locos go in for when sale are slow " Belfast seats free" +tax (Flybe from LBA) sure its still cheap, but the threshold of "nah, stay at home, its raining anyway" will soon be reached.

Interest rates on leases are normally fixed for the term of the lease, jet2 may own their 733 but if (as a group) they have `any` borrowing then they like you and i will have to pay more when interest rates go up (next month?)

[Golf Charlie Charlie]

Surely even if an airline owns its aircraft, ownership is still usually financed by debt (like your house mortgage). This particularly applies to younger airlines. So, either way, a downturn always affects airlines, regardless of lease or ownership, as aircraft need to be kept in the air. In the case of leases, it is usually easier to return the aircraft. Owned aircraft are usually collateralized to the banks or finance companies, but in this market few lenders want to take back the aircraft as resale/residual values for most aircraft are quite poor, so lenders may be prepared to support operators and earn some interest at least by changing loan terms. Same with lessors too - rates and term are negotiable.

Larger and older airlines usually have the odd spare aircraft or other fixed assets around which they could sell in case of need, but this is unlikely to be applicable to the newer low-cost carriers. I don't think a rise of a few percentage points in interest rates will make a huge difference to the fortunes of the airlines, as the market probably has a lot of slack and spending power. What would make a worse impact, I think, would be a rise in unemployment. And as for Yorkshiremen and Scots being more canny with their money - maybe, but I am not sure if this is not an historic myth these days - I think they use their credit cards up there as much as anywhere else !

[Yak97]

Hooded you wrote: " Glad Jet2 owns all it's aircraft and......"

From the Dart Group accounts June 2003:

Quote:

16. Creditors: amounts falling due after more than one year - (continued)
Details of loans not wholly repayable within five years are as follows:-

Secured loan of US$10,255,000 repayable by monthly amounts until August 2008 with a balloon payment payable in August 2008
Secured loan of US$5,900,000 repayable by quarterly instalments with a balloon payment payable in March 2013
Secured loan of US$31,575,000 repayable by quarterly instalments with a balloon payment payable in May 2012

Included in the total loans of £35,096,000 (2002 -£23,078,000) are loans totalling £6,326,000 (2002 -£7,022,000) which bear interest at a fixed rate of 5.56%. The remaining capital balance of £28,770,000 (2002 - £16,056,000) bears interest at variable rates of less than 1% over LIBOR. The loans are secured over certain of the Group's aircraft.

Unquote

Some 47M USD of borrowing. No Hooded, Jet2 don't own their aircraft, the banks do and I would think any interest rise would be of concern

[In trim]

UK interest rates on there own will clearly have an effect. However, the bigger factor is foreign exchange rates.....both the dollar (leases, fuel, etc. etc.) and the Euro etc. (landing, handling, etc.)

[KAT TOO]

I would guess that the accounts of most of the major airline groups have got pro rata figures in their accoints. The main point here is earning a return that covers the interest, pays the costs and (hopefully) makes a profit. I think that the dart group seem a sensible lot, they have been around a long time. They will have thought through the earning cycle on their investment and will have an exit plan if the return ain't coming thro,i am sure that baby or easy would take the fleet and the routes if channex got cold feet. I hope that jet2 do well next Summer, its good for Leeds, good for jobs and beats driving to Liverpool or East Mids.

[onehunga]

A bit of an educated guess here but you would probably find that any sensible airline would cover the interest rate risk through either hedging the rate, or negotiating fixed rates. They might have even managed to negotiate interest free periods as an inducement to purchase/lease in the first place. As discussed above the risk probably lies more in the knock on effects on revenue streams from passengers not spending during tougher economic times. Also the effects from exchange rate fluctuations on any unhedged expenses.

[LGS6753]

The Bank of England adjust interest rates to control inflation. The main factor to control is private expenditure, and higher interest rates do this by taking cash out of people's pockets.
Ergo, if people haven't got as much cash, they will theoretically spend less on discretionary items (like weekends away). This will have a directly negative impact on the locos, since that is a major sector of their market.
Interest rates will also affect corporates, who will be paying more on their borrowings, but will also be suffering from reduced consumer expenditure (see above). The resultant belt-tightening may encourage more businesses to send their employees on locos than full-service airlines.
The events of Sept 11th 2001 had the effect of reducing the propensity to spend, in much the same way as an interest rate increase may do. The locos suffered, but by being nimble, adding to the marketing spend, and having a lower cost base, they recovered very quickly, and in some cases became stronger. The airlines that really suffered were the high-cost, business-traveller airlines, and especially those that were financially weak or unable or unwilling to move quickly.
Any interest rate increase this week is only likely to be 0.25%, so the effects won't be dramatic, but the ones that suffer will be the high-cost, financially weak, full service operators.
You can tell me who they are.......