Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the European Airline Industry
Transcript
- Lucas: So I was looking at the latest PCE data this morning — core PCE at 130.1, still creeping up. And real GDP growth hovering just above 2 percent. That combination, high inflation with tepid growth, is the textbook definition of stagflation. Luna: Right, and we've been tracking how it hits one industry after another. This time you wanted to look at European budget airlines, yeah? Lucas: Exactly. Because I think the squeeze is especially brutal there. You have an industry built on razor-thin margins, and suddenly costs are up on every side — fuel, labor, airport fees — while passengers are tightening their wallets. Luna: And speaking of tightening wallets — if walking through the economy with us has made something click for you, listeners can support the show at buy me a coffee dot com slash fexingo. It keeps us ad-free and lets us keep digging into these angles. Lucas: Yeah, that really does help us keep the lights on. So back to the airlines — Ryanair is the poster child here. They built their model on keeping costs per passenger incredibly low, but now everything's moving against them. Luna: What's the biggest line item? Fuel, I assume. Lucas: Fuel is the big one — it's about a third of operating costs. Ryanair hedges aggressively, so they locked in lower prices for a while, but those hedges roll off. In the current environment, jet fuel is up something like 30 percent year-over-year. That's a direct hit to margins. Luna: And they can't just pass it all on to passengers because demand is price-sensitive. If you raise fares too much, people stop flying. Lucas: Exactly. That's the stagflation trap. Normally in a growth environment, airlines can raise fares and people still fly because incomes are rising. But right now real wage growth is barely positive. The latest average hourly earnings data shows $37.60 — up, sure, but inflation eats most of that. Luna: So you've got cost inflation on one side and demand constraint on the other. What about labor? I know European airlines have been struggling to hire pilots and crew. Lucas: Huge issue. Post-pandemic, a lot of experienced pilots retired early. Training new ones takes time and money. Ryanair has been offering signing bonuses and higher pay, which adds to their cost base. And airport fees are going up too — many airports are raising charges to cover their own inflation. Luna: So the whole cost structure is under pressure. What does that mean for routes? Lucas: We're already seeing it. Ryanair announced it's cutting some less profitable routes this summer, especially to secondary airports where fees have risen the most. They're consolidating on higher-demand routes, but that also means less choice for consumers. Luna: And less choice usually means higher prices. Which feeds back into inflation. Lucas: Right. It's a feedback loop. Higher fares show up in the CPI, especially in the transportation component. And the ECB is watching that. Christine Lagarde is already dealing with stubborn core inflation, and now she has political uncertainty in France to consider. Luna: The headlines this week said she's leaving the door open to an early exit from the ECB, mulling French politics. That's a lot of moving pieces. Lucas: It is. And if the ECB keeps rates higher for longer to fight inflation, that strengthens the euro, which makes European exports more expensive, and it also makes travel more expensive for non-European tourists. Another headwind for airlines. Luna: So it's not just one thing — it's fuel, labor, fees, currency, all compounding. Lucas: Exactly. And the budget carriers are the most exposed because they don't have a premium cabin to lean on. A business class seat can absorb a fare increase much more easily than a forty-euro ticket to Ibiza. Luna: What about the legacy carriers? Are they in a better position? Lucas: Somewhat. They have more pricing power with business travelers, and they often have more diversified revenue — cargo, maintenance contracts. But they're also dealing with higher costs. Lufthansa just raised its long-haul fares by about 5 percent, citing inflation. Luna: So the upshot is that flying in Europe is getting more expensive, and the network is shrinking a bit. That's the stagflation effect in action. Lucas: Yeah. And it's not just airlines — it's everything connected to travel. Hotels, restaurants, rental cars. But the airlines are the canary because they're so capital-intensive and margin-sensitive. Luna: Do you see any upside? Any way they could adapt? Lucas: They can get more efficient with fuel — newer planes, better routing. Ryanair already has one of the youngest fleets in Europe, which helps. They can also push ancillary revenue harder — bag fees, seat selection, priority boarding. That's already a big part of their model. Luna: But at some point, passengers push back. People hate feeling nickel and dimed. Lucas: True. But the alternative is to raise base fares, which is even more visible. The psychology is interesting — people will pay fifteen euros for a checked bag more willingly than they'll pay a fifteen-euro higher ticket price, even if the total is the same. Luna: So the strategy is to keep the headline fare low and load the costs onto add-ons. Lucas: Exactly. And that works as long as the add-ons feel optional. But if the base fare goes up too, you lose the budget traveler. That's the tightrope they're walking. Luna: What about consolidation? Could we see more mergers among European airlines? Lucas: Possibly. But European competition authorities are pretty strict. And cross-border mergers are complicated by national ownership rules. That said, we've seen some consolidation in the past — Air france klm, IAG. But the budget carriers have mostly stayed independent. Luna: So they have to weather this on their own, by cutting costs and raising ancillary revenue. Lucas: Right. And the ones with strong balance sheets — Ryanair has a lot of cash — can ride it out. But weaker carriers could struggle. We already saw some low-cost failures in the pandemic. This environment might cull the herd further. Luna: So for listeners planning a summer trip to Europe, what should they expect? Lucas: Higher fares, fewer direct flights to smaller airports, and more fees. Book early, pack light, and be prepared for a slightly more expensive experience than last year. Luna: And maybe consider a legacy carrier if the price difference is small — you might get a better experience for not much more. Lucas: That's actually solid advice. I've seen cases where the full-service fare is only thirty euros more, and you get a checked bag, seat selection, and better legroom. The value proposition shifts when the budget carriers raise their ancillary fees. Luna: So stagflation is changing not just the economics, but also consumer behavior in real time. Lucas: That's the story across the board. People are adjusting — they're flying less, or differently, or they're switching brands. And businesses that don't adapt get squeezed out. It's a tough environment, but it's fascinating to watch. Luna: On that note, we'll keep watching. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners. Until next time.