Is the effect of flight compensation on airlines just hot air?
The latest half-yearly profits for Ryanair were announced on November 4th, they revealed that the company’s H1 profits had risen by 1% to €602 million with a 2% rise in revenue per passenger.
Announcing the profits, a Ryanair statement said: “Unit costs in H1 rose 3% mainly due to a 7% increase in fuel costs. Excluding fuel, sector length adjusted unit costs fell by 2% as we continued to deliver cost efficiencies, despite higher Eurocontrol charges and the impact of a 2% pay increase from April last.”
Hold on. No mention of the cost of flight compensation claims
Is this the end of budget travel or just scaremongering?
Airlines have long complained that they consider the €250, €400 and €600 statutory charges outlined under Regulation EU 261/2004 are excessive and that they will cause serious financial problems for airlines. Martin Lewis of moneysavingexpert.com has also talked about the impact, saying: “It could cripple budget airlines’ pricing models and possibly worsen the financial troubles of airlines already struggling in a tough economy.”
Do the figures stack up?
If we dig a little deeper we can find out that Ryanair predict they will make a full year profit of €570,000,000 in 2014 If we break that down further we can say that Ryanair expect to make €1,561,643 profit per day, and €65,068 profit per hour. Keep on going and we get to €1,084 profit per minute.
The EU rules on passenger rights represent an average cost of between 0.6% and 1.8% of the airlines turnover.
Ryanair only fly Boeing 737-800 and their website confirms that has a capacity of 189 passengers. For the sake of argument, let’s imagine that a Ryanair flight is delayed by four hours and there are no extraordinary circumstances.
Let’s also imagine that all 189 passengers know about their rights under EU Regulation 261/2004 and all make a claim for statutory compensation of €400. Ryanair’s total liability on that flight would amount to €75,600, or in other words it would take Ryanair one hour and nine minutes worth of profit to pay for this liability (and that’s before we take into account their €2.50 levy for compensation they charge for every passenger into account).
But let’s not forget how likely this hypothetical scenario is to happen: We must remember that some flights are delayed by extraordinary circumstances and therefore airlines do not have to pay compensation in these cases.
It is estimated that around just 1% of flights qualify for compensation under EU261. Our article on extraordinary circumstances gives more details about the delay causes which you can and cannot claim for.
Furthermore, very few people in the United Kingdom are aware of their rights and entitlements under the Regulations and as such the hypothetical scenario of a plane full of passengers claiming would be unlikely to come to pass. On average we see less than 10 people per claimable flight so whilst the liability can come to €75,600, the reality is that at the most the airlines are paying out just €4000-€5000 per claimable flight. Their own accounts show that Ryanair make that much money before breakfast. And yet the airlines continue to dispute these liabilities and perpetuate the myth that this is an intolerable burden for them.
So are the airlines and Martin Lewis correct in talking about the airlines being crippled by the compensation? The figures don’t seem to support that.
Ah, I hear you say, but Ryanair are a unique model. Yes they are, I completely agree. Their model is fantastic and is run with such little waste by Michael O’Leary and his management team and their numbers are the best in years. But even if we look at a different model, the figures still stand up.
Ultimately the numbers do not lie.
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What does flight compensation mean for ticket prices?
Since the landmark Huzar and Dawson cases flight compensation has received widespread coverage in the mainstream media. With them, the judgments have also brought concerns amongst consumers and commentators alike that they will push up air fares. Many have expressed their fears that airlines will be forced to raise ticket prices as a result of paying out for flight delay compensation claims but is there any evidence to substantiate these claims?
The European Commission published a report in May 2014 titled ‘Complaint handling and enforcement by Member States of the Air Passenger Rights Regulations’. The report found that “…the EU rules on passenger rights … corresponds approximately to between €1 and €3 per one-way ticket.”
In other words, if everyone who could claim flight compensation did claim, it would only equate to a couple of pounds per ticket on the cost. Our article on the impact of the Huzar judgment on ticket prices has more information on this.
The report goes on to say “the EU rules on passenger rights represent an average cost of between 0.6% and 1.8% of the airlines’ turnover (depending on the proportion of entitled passengers that claim compensation).”
This would suggest to me that claims of flight compensation signalling the end of budget travel prove themselves to be little more than hot air when put under any real scrutiny.
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