Europe’s biggest LCC trio: prospects of growth and partnerships
Low-cost airlines play a major role in Europe. Their success can be proven by the growing number of passengers they carry. Ultra-low-cost carrier Ryanair has soared to become one of Europe’s biggest airlines by number of passengers. Fellow LCCs EasyJet and Norwegian are also major players. In 2017, Ryanair carried 120 million passengers. EasyJet flew 80 million passengers. And Norwegian transported 30 million travelers. Despite some stumbles, all three LCCs are prepared for continued growth, and possibly considering consolidation.
Ryanair: enjoying cost leadership
On July 21, 2017, Ryanair released its annual financial report, showing the airline’s strong performance in 2017. The results show that operating revenue grew by 2 percent, while profit after tax increased by 6 percent to €1.316 billion.
Traffic grew by 13 percent to 120 million passengers as load factor rose to 94 percent. The average fares fell by 13 percent to €41. The airline also drove down costs with a five percent (ex-fuel) unit cost reduction in 2017.
The carrier launched 206 new routes and opened 10 new bases. It also expanded its fleet by 12 percent with the deliveries of 52 new B737-800. Ryanair announced it is going to take delivery of 210 B737-MAX-200 aircraft from April 2019.
The airline states that these results are “a testament to the strength of Ryanair’s model” and that the carrier “can grow at both primary airports and new destinations while widening the cost gap between us [Ryanair] and other European airlines.”
In a Q3 financial report, released on February 5, 2018, Ryanair recorded a 12 percent rise in profit to €106 million as average fares fell by four percent to €32 per customer. Traffic grew by six percent to 30.4 million with load factors up by one percent at 96 percent. Unit costs fell by one percent (ex-fuel unit costs rose by three percent).
In Q3 Ryanair also took delivery of nine new B737-800s and said it now expects 2018 full year traffic growth of eight percent to 130 million. The airline maintains its full year guidance in a range of €1.40 billion to €1.45 billion.
As for early indications for 2019 fiscal year, Ryanair states that its traffic will grow by six percent to 138 million. The carrier should provide a more detailed FY2019 guidance during its full-year results and investor roadshow in May 2018.
Ryanair Boeing 737-800 (Photo by Adrian Pingstone)
EasyJet: from strength to strength
EasyJet presented its financial results for the year ending on September 30, 2017, stating a record number of 80.2 million passengers, up 9.7 percent year on year, with record load factor at 92.6 percent, compared to the 91.6 percent in 2016. Capacity grew by 8.5 percent to over 86.7 million seats.
The carrier reported total revenue of £5.047 million (€5.730 million), up 8.1 percent with revenue per seat broadly flat year on year at £58.23 (€66.11), reflecting a currency benefit, strong ancillary revenue and increased load factors, alleviating ticket pricing pressures.
Headline cost per seat excluding fuel at constant currency increased by 0.9 percent to £38.69 (€43.93), in line with guidance, with the investment in resilience representing an increase of 0.7 percent of that increase, as well as the impact of continued high levels of disruption. The financial year 2017 headline cost per seat, excluding fuel and disruption, at constant currency was marginally lower than 2015 financial year.
The carrier also reported a headline profit before tax of £408 million (€463 million), despite an adverse headline currency impact of £101 million (€115 million). Reported profit before tax of £385 million (€437 million), after non-headline costs of £23 million (€26 million) mainly relating to sale and leaseback charges.
With these results, EasyJet highlights the resilience of its business model, stating it has delivered a “robust performance”, “demonstrating strong cost control with enhanced network position and customer proposition”.
Further on, EasyJet plans to grow capacity by around six percent for the 2018 fiscal year, excluding any prospective Air Berlin (AB1) capacity. In October 2017, EasyJet announced an agreement to acquire part of Air Berlin’s (AB1) operations at Berlin Tegel airport for £40 million (€45 million), subject to antitrust and regulatory approvals.
The acquisition, now completed, was supposed to result in EasyJet entering into leases for up to 25 A320 aircraft, offering employment to up to 1,000 former Air Berlin (AB1) crew and taking over other assets including slots.
EasyJet stated it expects to incur headline losses of around £60 million (€68 million) on its activities at Tegel in 2018 financial year, as it starts operations in January 2018, using wet lease aircraft with initially lower loads and yields. In addition, one-off non-headline costs associated with the transaction are expected in the 2018 financial year of around £100 million (€114 million).
Looking onwards, the carrier says it “will continue its strategy of purposeful investment to drive profitable growth to secure leading positions at primary airports, increasing returns over the long-term.”
EasyJet has delivered a strong performance already, following its set strategy, as shown in Q1 of 2018 results. Total revenue increased by 14.4 percent to £1.140 million (€1.294 million) reflecting an increase of 1.4 million passengers carried through the period. A 6.6 percent increase in revenue per seat at constant currency.
The number of passengers carried increased by eight percent to 18.8 million, driven by a growth in capacity of 5.5 percent to 20.4 million seats and load factor increasing by 2.1 percentage points to 92.1 percent.
Commenting, Johan Lundgren, the airline’s CEO said “EasyJet delivered a strong start to the financial year with a significant growth in revenue in part driven by an increase in passengers flown and strong growth in inflight and ancillary sales as we offer more and better quality options for our passengers.”
EasyJet states it continues to focus on cost, generating approximately £28 million (€32 million) in lean savings in the quarter. Lundgren says “My aim is to help EasyJet to go from strength to strength… We expect to reach a series of milestones in 2018.”
EasyJet Airbus 319-111 (Photo by Anna Zvereva)
Norwegian: preparing for future growth
On February 15, 2018, Norwegian released its full year and Q4 2017 results. According to the report, in 2017, the airline suffered a net loss of -299 million NOK (€31 million), while earnings before interest, taxes and depreciations (EBITDA) was 60 million NOK (€6.2 million). The extraordinary costs were related to increased fuel prices, wet lease and passenger care.
However, the airline says that “going into 2018, Norwegian is far better positioned with stronger bookings and a better staffing situation.” It also maintains that “major investments”, which were done back in 2017, will “prepare for future growth”.
The airline’s total revenue was almost 31 billion NOK (€3.2 billion) – an increase of 19 percent compared to 2016. A total of 32 new aircraft entered the fleet, contributing to a production growth (ASK) of 25 percent. Traffic grew by 13 percent to 33 million passengers, while the load factor remained unchanged at 88 percent.
For Q4, the net loss was 919 million NOK (€95 million). Total revenue was more than 7.8 billion NOK (€805 million), an increase of 30 percent from the same period last year, primarily driven by international growth as well as an increased traffic in the Nordics. Over 8 million passengers flew with Norwegian this quarter, a growth of 12 percent, while the load factor was 85.3 percent.
Norwegian says it “made major investments in the fourth quarter related to training pilots and cabin crew on both its wide-body and narrow-body fleet to prepare for the growth in 2018. CEO Björn Kjos said the company was not satisfied with the 2017 results, but that these were influenced by “global expansion driven by new routes, high load factors and continued fleet renewal.”
The Nordic carrier believes it is “far better positioned for 2018”, with stronger bookings, a growing network of intercontinental routes, and a better staffing situation. In addition, “Our major global expansion reaches its peak in the second half of 2018, when 32 of our 42 Dreamliners on order will have been put into service,” Kjos said.
Norwegian Air Shuttle Boeing 737-800 (Image source: BGR)
The LCC trio: joining forces?
In February 2017, rumors emerged about Norwegian’s plans to partner up with Ryanair and EasyJet for an alliance powerful enough to challenge more established global carriers, as budget airlines all over the world continue to rise.
The partnerships between the currently rivaling airlines would allow the three LCCs to compete not only in Europe, but also the markets of the U.S., the Middle East and Asia, said Norwegian’s chief in an interview with CNN Money.
One important aspect to consider is that the European low-cost long-haul model has indeed taken off. As LCCs push into the long-haul segment, the pressure on flagship carriers, for which until now long-haul has been an area reserved for them, will continue to increase.
The alliance, therefore, would aim to challenge the long-haul routes of major legacy airlines, such as British Airways or Emirates, with lower ticket prices and links to more regional airports.
Kjos said that he hoped to formalize a partnership with Ryanair. “If we can do it with Ryanair, we can cover lots of routes,” he said. “We should definitely like to do it with EasyJet as well.”
A spokesperson from Ryanair told The Telegraph that “We are speaking to a number of airlines concerning feeding their long-haul flights... It’s a logical move and a very attractive proposition for long-haul carriers.”
Experts in LCC mergers and acquisitions activity said the principal reasons an LCC may seek to merge with a potential partner or acquire a competitor, is network growth, to remove competition, gain access to new market, and relieve economic pressure, Journal of Air Transport Management reported.
Pressures on costs and profitability
According to The Financial Times, fifteen year ago, budget airlines had just over nine percent of market share in Europe. Today, as their networks expand, LCCs provide approximately 40 percent of all scheduled airline capacity in Western Europe. This is what analysts say led to a fundamental change in the airline market, with FSCs emulating the practices successfully introduced by LCCs.
The growth of price-competitive LCCs has crimped profits at Europe’s FSCs. The performance of these carriers, particularly the mid-size and smaller FSCs that do not fly the more profitable long-haul routes, has been uneven at best, BCG consulting reports.
From 2000 through 2014, Europe’s FSCs racked up a total of £1 billion (€1.1 billion) in aggregate profits but also suffered £12 billion (€13.6 billion) in losses. Meanwhile, LCCs have steadily built profitable businesses, taking significant market share (approximately 30 percent and growing) and generating £11 billion (€12.5 billion) of profits with no loss-making years.
According to Hugo Canelas and Patricia Ramos, partners at BCG consulting, FSCs are at a disadvantage by their high legacy costs and their lack of flexibility in adjusting supply to shifting levels of demand. Thus, they face an increasing need to restructure their costs and operations, in light of the rise of LCCs. Global FSCs and LCCs can make a variety of strategic moves to address their needs. Within these are various collaboration and consolidation options.
Industry experts, interviewed by Journal of Air Transport Management, confirmed that the reasons for mergers of LCCs and that the challenges such events pose are largely the same as mergers between FSCs. They predict that as the European LCC market reaches maturity, it is likely that more mergers and acquisitions will occur.
Indications for a move towards consolidation
A partnership between the three LCCs – Ryanair, EasyJet and Norwegian – would enable passengers to buy connecting flights across participating airlines’ networks, without booking separate tickets. It would also enable the LCCs to compete with legacy airlines, driving down the cost of long-haul flying, The Telegraph explained.
The European airline industry has been experiencing a spate of airline bankruptcies that began with the Italian legacy carrier Alitalia, which initiated insolvency proceedings on May 2, 2017. Air Berlin (AB1) , which filed for insolvency in mid-August 2017. And the British leisure carrier Monarch, which ceased operations on October 2, 2017.
Analyst say that a common cause, though not the only one, in the demise of these three airlines was the difficulty they had competing in the European market with low-cost carriers and ultralow-cost carriers – Ryanair, EasyJet, and Norwegian among them.
In addition, Alitalia, Monarch and Air Berlin (AB1) each had long-haul operations that were not large enough to compete on level ground with the long-haul networks of major legacy European airline groups – Lufthansa (LHAB) (LHA) , Air France-KLM and IAG.
There are indications, therefore, that the recent collapse of these three carriers will result in some consolidation of the European airline market, Travel Weekly reported.
“The [airline] sector will continue to consolidate because the business models are in the process of changing”, said Stephane Albernhe, the managing partner at Archery Consulting. “It is an underlying trend in Europe,” Albernhe said pointing out the U.S. where four ‘consolidators’ are in the lead: American, Delta, United, and the low-cost Southwest.
John Strickland, director of JLS Consulting, said that in the context of fierce worldwide competition, “mergers, takeovers and joint ventures will be increasingly important,” AFP-JIJI reported.
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