How are Europe’s low-cost carriers handling price wars?
With a price war raging on in Europe between full-service carriers and their no-frills counterparts, the former airlines are grasping to hold onto their passenger share in markets, where a few years ago, the competition was rather scarce.
Countries like Austria, Germany, France and Spain have become battlegrounds, sparking public comments from top-level executives, including Lufthansa’s CEO Carsten Spohr stating that the low-cost business model is “economically, ecologically and politically irresponsible,” while Austrian Airlines’ CEO aimed directly at Ryanair group CEO Michael O’Leary, saying that he is wrong “if he thinks that he can overtake us here in Vienna.”
And it is fairly clear that the big groups in Europe are struggling to contain low-cost carriers within their own markets, forcing them to react and present answers to the expanding LCC presence, including establishing their own brands to attract price-sensitive consumers. Prominent examples are Eurowings, Transavia and Vueling from Lufthansa, Air France-KLM and IAG groups, respectively.
But what about the other side of the spectrum? If full-service airlines are struggling amidst increasing pressure on yields, how are the low-cost carriers faring, bearing in mind that the top three independent no-frills airlines, namely easyJet, Ryanair and Wizz Air, have released their latest financial results in the past two weeks?
easyJet’s ambitious growth
On November 19, 2019, the Gatwick-based airline announced its financial results for FY2019 that ended September 30, 2019.
Total profit before tax equaled to $556.7 million (£430 million), compared to FY2018 result of $576 million (£445 million), even if easyJet transferred 7.6 million more passengers. Worryingly, easyJet revenues per seat were down by 1.8% (reported currency), while costs, excluding fuel, decreased by 0.4% (reported currency). The airline finished of FY2019 with 331 aircraft in its fleet.
easyJet blamed the dwindling revenues on a macroeconomic slowdown in Europe, the dilutive impact of full-year operations at Berlin-Tegel Airport (TXL), the fact that easyJet could not reap in the benefits after airline bankruptcies like it did in 2018, Brexit-related market uncertainty, and fuel costs, which increased by 8.4%.
Nevertheless, the low-cost carrier stayed resilient in FY2019 despite the operating environment and managed to increase capacity in primary airports, especially in airports where easyJet is the number one or number two airline by market share. Overall, compared to FY2018, the carrier increased its capacity by 10.3%.
The company also pounced on the Thomas Cook bankruptcy. While it is not highlighted in the FY2019 report, as the former officially collapsed just seven days before easyJet’s financial year ended, it has acquired crucial slots at London-Gatwick (LGW) and at Bristol Airport, United Kingdom (BRS), allowing the airline to further expand capacity from the slot-constrained Gatwick airport. In addition, the carrier is slowly shifting from the A319 and increasing capacity by increasing the number of A320 and A321 aircraft it operates, an increase of 19 and four, respectively, while the A319 fleet decreased by three.
But easyJet is looking to further draw in customers and increase ancillary revenues with a new business venture, easyJet Holidays. According to the airline’s financial statement, around 20 million customers fly with easyJet to Europe’s most popular leisure destinations, yet only 0.5 million book accommodation through the airline’s website. Thus the new company, launching just before Christmas in the United Kingdom, aims to cater to the needs of the 19.5 million travelers with “unrivaled flight flexibility, curated portfolio of hand-picked hotels and compelling pricing.”
Looking at easyJet’s situation, it is clear that the airline looks to expand further – with organic capacity growth and by increasing the average seats on its aircraft, including a new business venture aimed at increasing ancillary revenues from accommodation bookings, the Gatwick-based airline is only cementing its position as one of the leading airlines in Western Europe, further putting pressure on its closest rival, British Airways. However, the fact that it is deferring the deliveries of 12 Airbus A320 family aircraft to 2023 shows that the creation of a holiday subsidiary is a costly venture in terms of cash flow.
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