Low Cost Carriers (LCCs)
A key structural change in aviation over the past decade has been the proliferation of low-cost carriers (LCCs). The low-cost model has overwhelmingly been the favoured mode of airline start-up over the period, and their spread around the world, into both short- and long-haul markets, has caused a fundamental shift in the competitive dynamic of the industry.
'Classic' characteristics of the low-cost model include:
- High seating density;
- High aircraft utilisation;
- Single aircraft type;
- Low fares, including very low promotional fares;
- Single class configuration;
- Point-to-point services;
- No (free) frills;
- Predominantly short- to medium-haul route structures;
- Frequent use of second-tier airports;
- Rapid turnaround time at airports.
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O'Leary: "Ryanair in robust good shape". Europe's highest margin airline despite revenue seasonality
Ryanair is on course to record a positive net income in both of its winter quarters for only the second time in eight years, consolidating last year's achievement. Its 3Q2016 net income more than doubled and it has yet again almost certainly closed calendar 2015 as Europe's most profitable airline by operating margin (even before many airlines report their results).
Since embarking on its programme to improve its product, network and customer service two years ago, Ryanair has achieved impressive results. Load factor has leapt forward, driving up unit revenue, while unit cost has remained under control. Interestingly, however, unit revenue growth has been highest in the already strong summer quarters. Although Ryanair is now achieving year round profitability, the seasonal variation in its revenues is even more pronounced than before.
FY2016 could be Ryanair's most profitable year in eleven years, and it also looks set to become Europe's largest airline group by passenger numbers in the next twelve months. As Michael O'Leary said of the airline that he has led for 22 years, "the business is in robust good shape".
Wizz Air's trading update for 3Q2016 paints a picture of an airline enjoying robust health. The number one airline between Central/Eastern Europe and Western Europe is growing rapidly, increasing its profit margins, raising its FY2016 profit target, and generating cash.
Moreover, Wizz Air may now be Europe's lowest cost airline, defined by its CASK over 12 months, although a lack of comparable data from current CASK king Ryanair means it's not currently possible to confirm this. Falling fuel prices (and its lower levels of fuel hedging) have helped Wizz Air's cost position, but it has shown consistent ex fuel cost control for many years.
Wizz Air's first two Airbus A321ceo aircraft joined its previously all-A320 fleet during the quarter, which also witnessed shareholder approval of its A321neo order. It will add 97 aircraft over the nine years from the end of FY2015 and the combination of larger aircraft with newer technology should help to take unit costs even lower. This will be crucial in its ongoing competition with Ryanair, the biggest airline in Europe and second biggest in Wizz Air's markets.
EasyJet has let slip that winter profits are falling, in spite of fuel price reductions. For the first time, its trading update for Oct-2015 to Dec-2015 (1Q of its financial year FY2016) gives a cost per seat figure, in addition to the usual revenue per seat. Europe's second largest LCC did not announce a 1Q pre-tax profit figure, but it can be calculated from the other reported data that it dropped 25% year on year.
This was due to revenue per seat falling more than cost per seat. The weakness in unit revenue was the result of terrorist activity affecting demand in Sharm El Sheikh and Paris in Nov-2015. EasyJet actually performed better than expected on costs, but weak unit revenue has become a trend in recent quarters and is set to continue in 2Q.
Of course, the airline makes all its money in the summer, and so - large percentage changes in the small winter profits do not say much about the full year. EasyJet still expects a higher pre-tax profit this year, but the strong double digit earnings growth of recent years is becoming harder to repeat.
Europe has yet another airline trade body. It has been formed by Europe's three biggest legacy airline groups (Air France-KLM, IAG, Lufthansa Group) and its two largest LCCs (easyJet and Ryanair) to lobby European governments and regulators on airport charges, air traffic control issues and passenger taxes.
The six existing "airspace user associations" have already demonstrated unity on these matters through joint responses to the EU Aviation Strategy in Dec-2015 and Jan-2016. This leaves questions over the founding members' view of the new body's role relative to the old associations. Designed to increase the perception of industry unity, it avoids matters on which its founding members disagree, notably competition from Gulf airlines. Moreover, it has drawn a hostile response from the European airports' trade body, further highlighting divisions in aviation.
It is difficult to avoid the feeling that the new association changes little. Even its name lacks originality: Airlines for Europe, inevitably abbreviated for the digital age to A4E, is just an adaptation of Airlines for America. A4E will hope that A4A's loss of a key member (Delta) in 2015 is not a glimpse of its own future.
Paris Orly Airport: Air France shrinks as its LCC Transavia grows, but easyJet & Vueling grow faster
The Paris terrorist attacks on 13-Nov-2015 interrupted a healthy year of traffic growth at Paris Orly Airport but did not prevent it from posting record passenger numbers for the year. Its traffic suffered more in the global downturn than that of its larger sibling airport, Paris CDG, but it also recovered more strongly. However, Orly's growth has been slower than CDG's in the past two years, since Air France's network cuts at its number two airport have offset LCC expansion there.
As a low cost market Orly is relatively small, but it has the distinction of being an important base for the LCC subsidiary of two of Europe's Big Three legacy airline groups. It is the second largest base for Air France-KLM's Transavia, and the third largest for IAG's Vueling. However, both have much less capacity there than easyJet, for whom Orly is only the tenth largest airport.
Transavia's growth, while Air France shrinks, is little more than maintaining Air France-KLM's traffic at Orly. It is not maintaining the group's market share, since Vueling and easyJet are growing faster. A 2014 agreement with pilots limits Air France-KLM's room for manoeuvre.
Chicago’s O’Hare International Airport is the US’ third largest airport by passenger numbers (2014 and 2015) and the first in terms of aircraft movements. It is the ninth largest airport in the world, by passenger numbers. O'Hare sits in one of the country’s largest conurbations and in the midst of a transport crossroads and focal point for the whole of North America.
As with other long established big city hubs it could have been threatened by ever increasing direct point to point low cost airline services bypassing it, but 2015’s traffic growth figures indicate that the hub and spoke system for which it is a watchword – together with Atlanta and Dallas Fort Worth airports – continues to prevail. But O’Hare has had to contend with severe logistical problems, having been dubbed the most congested large airport in America.
This report looks at present and future growth trends at O’Hare, local and national airport statistics, how it matches up to both local and neighbouring airport competition across a range of metrics, at construction activities to counter the inherent congestion issues, and finally at its ownership and potential for privatisation.