Recent findings indicate that airlines and various businesses are increasingly implementing fuel surcharges to manage the impact of rising costs, a trend linked to inflation resulting from the ongoing conflict in Iran.
A survey targeting service sector companies, which includes airlines, revealed that surging fuel prices have prompted businesses to increase their prices at the quickest rate in over three years during April.
According to S&P Global, nearly 60% of the firms surveyed reported an uptick in average costs last month, primarily attributed to elevated fuel prices and wages, along with increased costs for metals and plastics.
IAG, the parent company of British Airways, Iberia, Aer Lingus, and Vueling, announced last month that it would implement “some pricing adjustments to reflect these higher fuel costs,” though it refrained from explicitly calling it a surcharge.
In a similar move, Virgin Atlantic introduced an additional charge of £360 for business class tickets and £50 for economy class. Its newly appointed CEO, Corneel Koster, conveyed to the Financial Times in April that achieving profitability this year would remain challenging.
Tim Moore, the director of economics at S&P Global, remarked that the increase in costs is “largely associated with heightened transportation expenses and rising wages.”
“Several businesses also reported the introduction of fuel surcharges for customers, which contributed to a significant rise in service sector inflation to its highest level in over three years during April,” he added.
Despite these challenges, companies noted a slight improvement in business performance last month, with S&P Global’s activity index rising to 52.7 across the sector, up from an 11-month low of 50.5 recorded in March.
The services sector in the UK, encompassing retailers, financial institutions, and transport services, represents roughly 81% of the economy, making its performance a focal point for economists.
However, Moore cautioned that this improvement could be temporary, as new business activity remains lackluster compared to earlier in the year, with the Iran conflict continuing to undermine business confidence in making investment choices.
Furthermore, the widespread increase in prices is expected to exert additional pressure on the Bank of England to raise interest rates, its primary tool for combating inflation, despite the decision by policymakers to maintain borrowing costs last week.
Bank of England Governor Andrew Bailey stated last week, “The longer this issue persists and the longer disruptions to energy supplies continue, the more complex the situation we find ourselves in becomes.”
Brent crude, the global oil price benchmark, recently dipped below $100 a barrel amid renewed optimism regarding US efforts to reopen the Strait of Hormuz.
However, prices have experienced significant fluctuations in recent months due to the rapidly changing circumstances in the Middle East. Analysts believe that the evolution of the conflict and its impact on energy prices will be crucial.
Thomas Pugh, chief economist at RSM UK, commented, “Ultimately, much hinges on the future trajectory of energy prices, yet we anticipate that the long-term consequences of the crisis will include rising unemployment and slower economic growth, suggesting that any tightening cycle will be brief and mild. Nevertheless, the possibility of rate hikes is increasing.”
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