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 (LHAB) (LHA) 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 (LHAB) (LHA) , 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.
Ryanair’s MAX issues
Prior to the 737 MAX crisis and the following groundings, Ryanair had high hopes for growth. Calling the MAX a financial “Gamechanger”, including the fact that Boeing developed a high-density version of the newest 737 iteration, the -200, the Irish company expected to grow by 7% in FY2021. Yet due to the groundings, expected growth was slashed by 4%, including the closure of six bases for the Winter 2019 season.
For the remaining financial year, which ends in March 2020, the Irish airline still expects to grow passenger numbers by 8%, with $892 million or $1 billion (€800-€900 million) profit after tax, a slight decrease from FY2019 result of $1.1 billion (€1.02 billion).
Despite the challenging environment due to the 737 MAX operational issues, Ryanair announced several new bases and routes to never-explored countries, including Armenia, Georgia, Lebanon, Ukraine and Turkey. But Austria, France, with three new bases in Marseille (MRS), Bordeaux (BOD) and Toulouse (TLS) and Germany became the main battlegrounds with the network airlines for Ryanair and its group subsidiary, Laudamotion. Exempt from the MAX issues due to the fact that it is an all-Airbus A320 operator, the Austrian low-cost carrier is massively expanding, especially in Vienna, where in Summer 2020 the airline will base 19 aircraft.
Yet Vienna is not the only market where Laudamotion is expanding – bases in Dusseldorf, Stuttgart, Germany and Palma de Mallorca, Spain will also receive additional aircraft in Summer 2020.
Ryanair’s H1 FY2020 results as of September 30, 2019, indicate that the group‘s costs shot up by 16%, including a 22% increase in fuel expenses. Despite this, revenue per passenger increased by 1% compared to H1 FY2019 from $68 (€62) to 69 (€63), with costs per passenger (excluding fuel) increasing by 2% to $32 (€29). However, the Irish airline attributed the increasing costs to the fact that Laudamotion, which aims to reach a breakeven point in 2021, was absent from H1 FY2019 results – Ryanair consolidated the Austrian airline in late-August 2018.
Nevertheless, its position is comparably better than easyJet’s, as the Irish carrier expects a “better fare environment than last winter”, thus remains positive of a full-year revenue per passenger growth of 2-3%, despite the MAX groundings. However, Ryanair’s growth will be limited in the short-term, as the airline was supposed to take up 58 of Boeing’s newest narrow-bodies for Summer 2020. It now expects to receive only 20 737 MAX aircraft for the aforementioned season. Due to the delays, Ryanair anticipates that the cost savings from the MAX will only show up in FY2021, meaning it is very likely that the airline will expand following the cost reduction after introducing the MAX into its fleet.
Wizz Air‘s recovery
The purple airline’s H1 FY2020 results, ended September 30, 2019, showcase that the low-cost carrier successfully recovered its revenue performance, as between Q3 FY2018 and Q2 FY2019, Wizz Air’s ancillary revenues have been steadily going downhill. A new baggage policy, introduced in Q3 FY2019 spurred the growth of ancillaries, which have also increased in H1 FY2020 by $5.3 (€4.9) per passenger. Overall, Wizz Air’s ancillary revenues per passenger were equal to $35.7 (€32.3), while the average revenue was $83 (€75.6).
Most importantly, despite a spurt of passenger growth (18% compared to the corresponding period), the airline managed to decrease its Cost per Available Seat Kilometer (CASK) by 2.2%. However, considering the comparably smaller scale of Wizz Air (119 aircraft vs. easyJet’s 331 and Ryanair’s 478), managing to grow sustainably within one of the most competitive continents is an impressive feat.
And while Lufthansa’s (LHAB) (LHA) Group CEOs point their fingers at Ryanair and its CEO, Michael O’Leary, Wizz Air is slowly moving into Western Europe and making strides there. One prominent example is, of course, Vienna, where the latest results indicate that the Budapest-based carrier became the fourth largest airline in the Austrian capital. It plans to further increase the capacity of its base there, adding three aircraft in the next two years.
Overall, during H1 FY2020, Wizz Air posted a net profit of $410 million (€371 million), increasing the number by 85% compared to H1 FY2019. The outlook for the airline showcases that it will stick to its roots and tap into the potential growth of air travel in Central and Eastern Europe, as the carrier plans to add 15 aircraft to various bases in the region. Wizz Air expects to finish FY2020 with a net profit of $371 to $387 million (€335 to €350 million), further increasing capacity by 20%, while stabilizing its expenses – the low-cost carrier expects its total CASK to rise only by 2%, mostly due to the rise in fuel price.
Summarizing the current situation in the fight between Europe’s three biggest independent no-frills airlines and the scheduled carriers is the fact that despite severe challenges that each airline faces, including the slowing economy, Brexit uncertainty and delivery delays of both the 737 MAX and the A320 aircraft, low-cost carriers are still setting their eyes on expanding and growing. On the other hand, full-service airlines are set to slow down – for example, Lufthansa (LHAB) (LHA) is limiting its growth during Winter 2019, as “continued pricing pressures in Europe” have negatively impacted its revenues.
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