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UK airline bosses call out government on ‘knee-jerk’ tax cuts

By Jenal Mehta

10:54, 28 September 2022

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1.20389 USD
0.00814 +0.680%
IAG
IAG - GBP
1.3525 USD
0.0045 +0.340%
RYA
Ryanair
12.89 USD
-0.13 -1.010%
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105.8471 USD
-0.628 -0.590%
SPCE
Virgin Galactic
5.10 USD
0.19 +3.890%

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airlines sitting on the runway
British pound falls to its lowest value in years, industry leaders speak up. Photo - Getty Images

Airline leaders, including seniors from Virgin Atlantic (SPCE) and British Airways (IAG), have publicly called out the new budget plans set out by the UK government.

Following the news that the British government is planning to increase borrowing to pay for tax cuts, the financial markets went into turmoil. The pound has dropped to $1.06 (GBP/USD), its lowest value since 1985.

Airlines having high FX exposure with multi-regional operations and high fuel costs, as well as hedging operations to help offset these costs. The sector is, therefore, particularly sensitive to changes in currency rates.

This has prompted many industry leaders to question the benefits of the government's decision on tax cuts.

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Leaders speak out

Markets have been extremely volatile in the past few trading session, thus the statements made by industry leaders have not been sugar coated.

Michael O’Leary chief executive of Ryanair (RYA) said: “The Truss government has poured petrol on a bonfire with a Budget that does not really make a lot of sense, and is likely to drive inflation further.”

Willie Walsh, former head of British Airways (IAG), and now director at airline trade body International Air Transport Association said he is frustrated with “knee jerk” actions taken by the government to find solutions to challenges. He believes this is “an effort to make themselves look popular with the electorate, taking decisions that have massive economic impact on companies”.

Shai Weiss, the chief executive of Virgin Atlantic (SPCE) went as far as asking the government to reverse the decision. He called for “difficult decisions” which need to be made as the pound continues to fall. “Sometimes all of us in this room should be humble enough to say that if I said something that is not working, maybe I should reverse course. That is not a bad thing to do”

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Danni Hewson, AJ Bell financial analyst, said in an investor note: “The biggest problem the government has at the moment is trust."

She added: "It’s not that a bold new plan for growth won’t work, it's that they’ve not demonstrated to either investors or the public that they know how to make it work. They’ve not explained how cutting taxes will generate growth, when we can expect to see that growth or how quickly that growth will restore the dwindling public purse”

Why does currency matter to airlines?

One of the biggest costs to airlines is its fuel, costs can reach up to half of the company’s total expenses. Fuel is traded in US Dollars (DXY), thus a weaker pound to USD (GBP/USD) will increase fuel costs even higher.

A report by International Air Transport Association (IATA) explains “For an airline with international operations, the need to translate cash flows into different currencies, and the uncertainty surrounding the level of future exchange rates, gives rise to FX risk.

"The size of the FX risk varies, depending on the nature and scope of an airline’s operations, as well as its corporate strategy. For airlines, the main foreign currency exposure is often to the US dollar because key cost items, notably fuel, maintenance, and overhaul costs (around 40% of total operating costs), along with aircraft purchase and lease payments, are typically priced in US dollar terms.”

Furthermore, airlines often deal in the futures market to hedge their fuel costs, and market volatility, in both the forex and oil futures markets can erase any benefits they might have gained from this hedging.

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