British Airways’ owner IAG has confirmed it is making ‘pricing adjustments to reflect higher fuel costs’, as a new survey reveals that airlines and other companies are increasingly using fuel surcharges to cover soaring costs. The findings highlight how rising energy prices, linked to geopolitical tensions, are driving inflation in the UK economy.
Survey Shows Fastest Price Rises in Three Years
A poll of companies in the services sector, which includes airlines, found that rising fuel prices contributed to businesses raising prices at the fastest pace in more than three years during April. Nearly six in ten firms surveyed by S&P Global reported that average costs rose last month, driven primarily by fuel and higher wages, but also by increases in the cost of metals and plastics.
IAG, the conglomerate that owns British Airways, Iberia, Aer Lingus and Vueling, stated last month that it would implement ‘some pricing adjustments to reflect these higher fuel costs’, although it stopped short of labelling the move as a surcharge. Meanwhile, Virgin Atlantic has added a charge of £360 to business class tickets, falling to £50 for economy. Its new chief executive, Corneel Koster, told the Financial Times in April that it would still be ‘hard to make a profit this year’.
Widespread Impact on Service Sector
Tim Moore, S&P Global’s economics director, noted that the rise in costs was ‘overwhelmingly linked to greater transportation bills and increased salary payments’. He added: ‘A number of firms also noted that they had brought in fuel surcharges for their customers, which led to a spike in prices-charged inflation across the service economy to its highest for over three years in April.’
Despite the cost pressures, firms reported slightly better business than expected last month, with the pollster’s gauge of activity rising to 52.7 across the sector, up from an 11-month low of 50.5 in March. However, Moore warned that the improvement ‘could easily prove short-lived’, as new business remained subdued compared with the start of the year, with the Iran war weighing heavily on firms’ confidence to make investment decisions.
Central Bank Under Pressure
The widespread price rises will further pressure the Bank of England to raise interest rates, its main weapon in tackling inflation, despite policymakers voting to keep borrowing costs on hold last week. The Bank’s governor, Andrew Bailey, commented: ‘The longer this problem goes on and the longer the disruption to energy supplies goes on, the more difficult the scenario we’re in.’
Brent crude, the global oil price benchmark, fell below $100 a barrel due to fresh hopes that US efforts to reopen the strait of Hormuz could come to fruition. But prices have swung sharply in recent months amid a fast-changing situation in the Middle East, and analysts said much will hinge on how the war, and its effect on the price of energy, continues to evolve.
Economic Outlook Uncertain
Thomas Pugh, chief economist at the consultancy RSM UK, said: ‘Obviously, everything depends on how energy prices move going forward, but we still think the ultimate impact of the crisis will be a rising unemployment rate and weaker economic growth, which means any tightening cycle will be short and shallow. But clearly the risk of rate hikes is rising.’
The UK services sector, which includes retailers, finance firms and transport companies, accounts for about 81% of the economy, making activity in this sector closely watched by economists.
