Cheap travel: is the bubble about to burst?

All the signs suggest that cheap travel is coming to an end. But don’t forgo this year’s holiday, says Nick Trend: it could be your last chance of a break at a reasonable price.

“You’ve never had it so good”: that was our front-page headline on this section just over a year ago when I was highlighting the incredibly good value to be had by travellers of all types.

Air fares, ferry and rail fares, car-hire costs, even insurance premiums – they were all spectacularly lower than the prices we had been having to pay only a decade earlier. Even foreign exchange rates were looking attractive this time last year: the pound was worth €1.41 and US$1.92, so most hotels and villas on the Continent were much cheaper than their equivalents in Britain, and the United States offered excellent value for money.

Prices had never been so low in real terms, and travellers had never enjoyed so many opportunities and such variety. For 10 heady years we had got used to air fares that were, in some cases, lower than the cost of travelling to the Each spring we were offered an ever greater choice of destinations from our local airport. And we had a new lease of independence, becoming enamoured with the internet and the idea that we could save even more money by cutting out the operator and booking direct.

But are the good times about to end? Have we been dancing drunkenly on the deck of a Titanic sailing towards an iceberg?

It looks pretty certain that our luck is running out. There are still plenty of cheap deals around at the moment, but this summer could be our last chance to enjoy bargain holidays, before the full impact of soaring oil prices and a weak pound hits the travel industry. So, if you can still afford it, don’t scrap your travel plans this year – make the most of them.

The storm clouds have been gathering for the past few months. First, the value of the pound began to plummet. Since this time last year, it has fallen to about €1.20, which means that, for British travellers, prices in the EU have effectively risen by nearly 20 per cent. The dollar has remained much better value, but there is now another catch.

The cost of oil has suddenly started to have a serious effect on travel costs – especially on fares to a long-haul destination such as the United States. There seem to be new increases every week. Virgin has increased its fuel surcharges three times since May 7. Totals for return flights (including security and insurance charges) are up from £111 (£133 on flights of more than 10 hours) to £161 (£223 if over 10 hours).

Premium-economy and Upper-Class passengers must now pay even more – up to £271 return extra for flights of more than 10 hours in Upper Class. A fortnight ago, British Airways raised its fuel surcharges once again – the latest rise adds another £60 return to the cost of many long-haul flights.

Ferry and cruise companies have been hit, too. Last Friday SpeedFerries raised fares on its Dover-Boulogne service by 50 per cent – from £36 to £54 return, citing a rise in the price of its fuel from 10p to 60p a litre as the reason. And as we went to press Oceania Cruises increased its fuel surcharge to £7 per guest per day for all new reservations from June 16.

But at least these price rises are only imposed on new bookings. If you have already bought your ticket, you won’t have to pay more. This is not necessarily the case with package holidays. The number of tour operators planning to impose surcharges this summer is rising steadily. Some 26 members of the Association of British Travel Agents and Tour Operators have already applied to start imposing the charges on customers who have already booked and paid for their holidays.

You may be forced to pay significant amounts of money, or lose your holiday altogether. Under EU rules tour operators are allowed to charge customers up to 10 per cent more for their holiday if costs (of aviation fuel or foreign currency, for example) rise after the holiday is booked. (They may do so as late as 30 days before departure as long as they absorb the first two per cent of the increase.)

Only if the tour operator tries to raise the price by more than 10 per cent are you entitled to cancel your holiday and receive a full refund. Otherwise, under the booking conditions, you can be forced to pay up or lose out.

Other costs have also been rising more stealthily, as travellers have been perceived as easy targets for governments and airports looking to raise guaranteed revenue.

BAA, for example, has been allowed to increase the charges it makes on airlines (which, of course, are passed on to passengers as part of the air fare) at Heathrow by 23.5 per cent since last year. This takes the charge per passenger to £12.80. It will also be allowed to increase its charges by 7.5 per cent above inflation for each of the next four years.

BAA defends this by saying that the money is needed for vital investment in the airport infrastructure and the costs of security.

Trailfinders, the flight specialist, reports that an ever-increasing proportion of the fares it sells are made up of taxes and charges. It gave me the example of a current return fare of £385.70 it is offering to New York with British Airways. The air fare itself is just £136, but by the time some 10 compulsory charges have been added on – including £40 of UK air passenger duty, £15.60 of US passenger tax, £19.70 of UK airport charges and £161 of fuel and security surcharges – the final fare the passenger pays has nearly tripled.

The no-frills airlines don’t use surcharges in the same way; they prefer to adjust their fares by the hour according to their costs and demand for seats. But in the past year they have begun to make flying much more expensive for anyone who wants to travel with luggage, to be sure of sitting with their family or travelling companions, or who can’t check in online.

For example, on a return flight to Marseilles with Ryanair some £45 in taxes and charges is already included in the fare. You will pay another £24 (including airport check-in fee) if you want to check in a bag on both legs, another £8 for priority boarding, and another £6.40 for each passenger if you pay by credit card.

We are suffering not only from increased costs. It looks as though the choice and variety of what has been on offer may be under threat. Some routes have already started to go. Two weeks ago DFDS announced that it would end its Newcastle-Norway ferry service in September, citing high fuel costs and the economic slowdown as key reasons. Then Ryanair announced that, although it intends to continue to expand its routes, it would be grounding 20 aircraft over the quieter winter months, because it was cheaper to keep them unused than in service.

In the United States, which is often a barometer for what will happen over here, Continental Airlines has just announced that it is cutting capacity by 11 per cent, while United Airlines is grounding 100 of its planes.

Ten days ago, Giovanni Bisignani, director-general of IATA (the International Air Transport Association), predicted that the aviation industry would lose US$2.3 billion in the current financial year.

He pointed out that, around the world, 24 airlines had gone bust in the past six months, and he expected more to go under.

Six of those airlines were British or flew into British aiports. They included the “business-class” carriers MAXJet and Eos, and the Hong Kong-based no-frills airline Oasis.

We have not yet seen any significant routes dropped by no-frills airlines. But they will clearly feel the pinch. Last week, Ryanair claimed that it was the most efficient and best placed to cope with high fuel prices. But it also admitted that, if oil prices stayed high, next year would see average fares rise by about five per cent and the airline would do no better than break even.

So how serious are things likely to get? The last time a major recession hit the travel industry, in 1991, one of the biggest tour operators – Intasun – and the leading budget airline – Air Europe – went out of business. Thousands of passengers were stranded abroad or lost money.

Although the situation today is not comparable, the omens are not good. We may be lucky – perhaps the oil price will fall back, or perhaps the highly competitive and efficient nature of most British airlines will enable all the major operators to survive the crunch. But they will have to look hard at which routes are worth keeping, and which will have to be abandoned.

And one thing is certain – if oil prices stay high, the pound remains weak and the economy stagnates, we will see an end to many of the bargain holidays and much of the cheap travel we have enjoyed over the past decade.

The worst is certainly still to come. To some extent we have so far been insulated from the full impact of rising costs because many travel companies buy fuel and currency well in advance. When airlines and operators have to negotiate new contracts, they will be facing much higher costs.

And that can only mean one thing for us. Just as it is hurting now each time you fill up the car, it will hurt even more when you book next year’s holiday.

So make the most of it in 2008.

telegraph.co.uk