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European Low-Cost Airlines See Growth Potential as Major Carriers Cut Capacity

Published: 2/9/2009
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An estimated 139.8-million passengers traveled in Europe on low-cost airlines during 2008. With some of the major European carriers going bust, airlines such as Ryanair and easyJet are consolidating their position in the market by using greater efficiency and a low-cost model.

As the economic downturn in Europe deepens, with most of its large economies now technically in recession and facing a gloomy 2009 outlook, some industries are trying hard to cope with changes in consumption and business preferences. In fact, Eurozone consumer and business confidence stood at a record 24-year low last December, undermining investment, employment, and consumer spending. A crisis in the financial sector, scarce credit, and rising unemployment are further affecting economic activity across Europe and offsetting the benefits coming from weakening inflation, lower oil and commodity prices, and a retreat in both the euro and the sterling pound.

The European airline industry has not been an exception. High fuel costs during most of 2008 forced airlines to increase airfares and charge for additional services in the interest of raising revenue. By the time energy prices peaked last year, fuel costs accounted for 30% of airlines' operating expenses, and an increase in airfares was the fastest response to cost pressures to stay solvent. Despite the subsequent fall in the price of crude oil, a weak economy with restricted spending on leisure and business travel did not help to reactivate demand for air transport. In a time of volatile fuel prices, airlines were able to respond by cutting airfares to stimulate demand and by restricting capacity and routes to offset higher costs and expenses. IHS Global Insight now expects airfares to decrease on a year-on-year basis for much of 2009, and to bottom out late in the year.

Demand for air transport is expected to experience additional downward pressure, and airlines are expected to cut fares further to try and maximize revenue. Top European carriers, including Air France-KLM, British Airways, and Lufthansa, have started considering acquisitions or strategic partnerships in an effort to deal with weaker demand and gain a larger market share through industry consolidation. On the other hand, low-cost airlines are proving more resilient even in times of economic downturn. Smaller low-cost airlines have been able to cope with the poor economic environment by catching a larger share of European passengers through greater efficiencies and a low-cost model. This segment of Europe's airline industry, dominated mainly by Britain's EasyJet and Ireland's Ryanair, has been able to capitalize on parts of the air-carrier market where other players are retreating fast. There has been a general reduction in competitor capacity in Europe of about 7%. But in countries like France, Italy, and Spain, this figure goes up to almost 30%, with Alitalia and local Spanish airlines accounting for most of the reduction. Other important players in the Europe's low-cost airline industry include Flybe, Jet2, Myair.com, Sky Europe, and Wizz Air.

Ryanair—Europe's largest low-cost airline—registered a drop in net income of more than 10% between 2007 and 2008 (from €435.6 million to €390.7 million), despite a remarkable 21% increase in revenues (from €2.237 billion to €2.714 billion) and a 13% increase in the number of passengers during the third quarter of 2008 (from 12.4 million to 14.0 million). Between 2006 and 2007, the number of scheduled passengers had increased 22% (from 34.8 million to 42.5 million). The airline posted a loss in the last three months of 2008, largely because it hedged its fuel requirements for that same quarter at levels above the prevailing oil prices. Ryanair now expects to return to profitability by early 2010. The company is gaining a greater share of its turnover from additional services, including hotel bookings, car hire, and travel-insurance, which together accounted for 22% of sales in the third-quarter 2008 (around €132 million). The airline has been in talks with Boeing and Airbus about ordering some 400 aircraft over the next two years. Ryanair’s current fleet comprises 166 aircraft, all of which are Boeing 737-800s (as of June 2008). Because both Boeing and Airbus expect a gloomy market this year, a potential order like this could probably generate a strong bid, with Ryanair as the main beneficiary, with expected price concessions.

Top European Low-Cost Airlines, as of June 2008

Airline

Country

Passengers (Millions)

Average Load Factor

Fleet Size

Ryanair

Ireland

53.3

81.2%

166

easyJet

United Kingdom

41.3

83.3%

163

Flybe

United Kingdom

6.9

-

69

Wizz Air

Hungary

5.1

85.0%

18

Jet2.com

United Kingdom

3.9

81.0%

30

Sky Europe

Slovakia

3.7

75.0%

15

Source: European Low Fares Airlines Association

While Ryanair is sticking to its strategy of increasing market share during the economic downturn, easyJet—its main competitor—is more cautious about expansion plans. The U.K. carrier is seeking to moderate its medium-term growth by deferring already-contracted aircraft deliveries for up to two years. Last year, easyJet’s net income fell 45.4% (from €152.3 million in 2007 to €83.2 million in 2008), despite a 31.5% increase in revenues (from €1.80 billion to €2.36 billion). The company has benefited from an increase in the number of passengers moving to low-cost airlines, with many business passengers now expected to switch to easyJet in search of value. Its revenue has been further boosted by the strength of the euro; easyJet has now increased its revenue forecast, but still raises some concerns regarding uncertainty for the summer season due to a weak pound and a gloomy economic outlook. Revenue figures for the last three months of 2008 increased 31.5%, while the number of passengers grew by 10.0%. By cutting down the least-profitable routes and destinations, and with more capacity being added at strategic airports (i.e., London Gatwick, Milan, Paris, and Madrid), the airline has benefited from capacity cuts made by some major competitors on its European routes, strengthening its presence where it competes with less-flexible national carriers. Older aircraft have been taken off the market, with the company now flying around 165 planes (as of September 2008).

by Daniel De Castro
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