Low Cost Carriers (LCCs)
easyJet’s 1H2013 pre-tax result improved by GBP51 million to a loss of GBP61 million. This puts it comfortably on course to achieve the current consensus forecast for record pre-tax profits of GBP410 million in FY2013. It may also be on another collision course with founder and largest shareholder Sir Stelios Haji-Ioannou over aircraft orders.
CEO Carolyn McCall believes easyJet can take further market share from non-LCCs on point-to-point routes. At its top 20 existing airports, where easyJet has 46 million seats (a share of 22%), she puts this potential additional market at 86 million seats. This analysis appears to pave the way for a large aircraft order after easyJet completes a review of its future fleet strategy later this year, although it insists that no decision has yet been taken.
This would not please Sir Stelios who said: “Good things happen to airlines that don’t order more aircraft.” Under Ms McCall's guidance easyJet's share price has more than doubled over the past year and not just because it didn't grow. It may be time for Sir Stelios to let go.
Shares in Turkish LCC Pegasus Airlines commenced trading on 26-Apr-2013 after an IPO that raised TRY649 million (EUR277 million). The IPO prospectus reveals that Pegasus is not only Europe’s second most profitable airline (based on 2012 operating margin), but also one of its fastest growing (2008-2013 CAGR in passenger numbers of 33% p.a.). Its unit costs (CASK) place it with Wizz Air and Ryanair as one of Europe’s three truly low-cost carriers.
Although Turkey was not immune to recession in 2009, air traffic continued to grow and Pegasus is still on a structural volume growth path not led by the economic cycle. Such a path does not guarantee earnings growth and Pegasus made a loss in 2011. Nevertheless, its low costs and strong presence in fast-growing Turkey and Central/Eastern Europe, should allow it to grow earnings in the future. Indeed, its breakeven operating result for the core business for the traditionally loss-making first quarter (reported 09-May-2013), with RASK up sharply and CASK falling, augurs well for FY2013.
Russia is preparing to open up its aviation market to more low-cost competition, in a potential game changing move that could lead to significantly more local and foreign LCC capacity over the next few years. In its efforts to create an environment able to foster low-cost competition, various changes to aviation legislation are in the pipeline.
Leading Russian carriers have signified their interest in entering the low-cost market while foreign LCCs have stated their interest in operating to, from and within Russia. The upcoming changes to legislation could lead to a significant increase in LCC activity in the country, with forecasts of LCCs gaining up to 35% market share within 10 years.
Airlines in Transition part 4: Bridging the gap between full service and low-cost or hybrid airlines
Our previous report on CAPA’s Airlines in Transition conference (Airlines in Transition part 3: How full service airlines are reshaping models to be more competitive) looked at how full service carriers are responding to the challenges of a weak global economy, high fuel prices and growing competition from LCCs on short-haul and Gulf carriers on long-haul. The low-cost sector is also going through a period of change, characterised by features summarised at the conference by Professor Rigas Doganis.
Like the FSCs, the LCC sector has seen concentration and consolidation and the two sectors have established a growing number of linkages. Moreover, the relaxation of the pure low-cost model of simplicity and the adoption by FSCs of LCC pricing strategies has narrowed the differences between them. Have the differences been eliminated? What are the challenges faced by LCCs/hybrids? What is the right number of fares to offer? We examine these questions and more in this fourth conference report.
Slovakia is seeing growth in the low-cost carrier market with Ryanair expansion and Wizz Air reportedly planning to resume operations. LCCs already account for about 80% of seat capacity in Slovakia, with Norwegian Air Shuttle also operating to the small Eastern European country.
Slovakia is poised to see significant growth in aviation activity in the coming years with Ryanair stating its intention to establish a base at the country’s main international airport, Bratislava Ivanka Airport.
In early Apr-2013 Ryanair announced plans to operate 16 routes from Slovakia's Bratislava Airport in summer 2013 including one new service to Trapani in Sicily, Italy. The airline expects to transport over 800,000 passengers through Bratislava in 2013 and support over 800 associated jobs.
Airlines in Transition part 3: How full service airlines are reshaping models to be more competitive
Over the past three decades, airline industry profits followed a fairly consistent cyclical pattern until the turn of the twenty-first century, which has so far seen seven loss-making years. If 2013 reports a profit, as forecast by IATA, the industry will have had four years of positive results (2010 to 2013). Nevertheless, profits are insufficient to cover the cost of capital and full service carriers still face critical challenges.
The global economy is still weak, fuel prices remain high, LCCs are undermining the legacy carriers’ short-haul markets and the rapid expansion of Gulf carriers is having an impact on their long-haul markets. In our third report on CAPA’s Airlines in Transition conference, we look at how FSCs are responding to these challenges.
In our first article based on CAPA’s recent Airlines in Transition conference, we looked at the evolution of airline alliances. In general, this theme is relevant only to the larger carriers with significant long-haul networks, but 86% of the airlines in CAPA’s database are not full members of a branded global alliance (BGA). In this second report from the conference, we ask where this leaves smaller and non-aligned airlines?
There are a number of benefits and issues that alliance members associate with their membership of a BGA. However, CAPA’s panel of smaller and non-aligned carriers believe that they can address these factors better and more flexibly by remaining outside the BGAs. These issues are mainly connected to expanding and securing the available revenue pool through wider access to markets, brand loyalty and distribution.
This analysis updates CAPA's previous study of European airlines’ labour productivity ("European airlines’ labour productivity. Oxymoron for some, Vueling and Ryanair excel on costs") to reflect the most recent financial results and adds four carriers not included in the original article (Wizz Air, Aegean Airlines and the two IAG subsidiaries British Airways and Iberia).
The contrasting performance of LCCs and legacy carriers is clear, although there are some notable exceptions to the pattern. BA and Iberia’s different labour cost productivity is significant, while Air France-KLM and SAS are weak performers.
We introduce an overall CAPA European airline labour productivity ranking, revealing the carrier with Europe’s most productive workforce, based on six measures.
Scoot selects Nanjing, capping a busy first year of operations for the Singapore Airlines subsidiary
Singapore Airlines' (SIA) low-cost long-haul subsidiary Scoot has completed the last phase of its initial network development, announcing on 8-Apr-2013 the selection of Nanjing as its 11th destination and fourth in mainland China. Scoot will be the only foreign LCC at Nanjing, which like most secondary cities in China is underserved from an international perspective.
Singapore-Nanjing will be launched on 3-Jun-2013 and give Scoot a total of eight routes by its first year anniversary on 4-Jun-2013. After celebrating its first year anniversary the start-up is expected to take a hiatus from fleet and network and expansion for at least 18 months. The hiatus will allow the carrier to focus on improving profitability as its initial network and business model beds down.
The hiatus also gives Scoot ample time to prepare for the delivery of the first of at least 20 787s in late 2014. The 787 will usher in a new era of growth and improved profitability for the carrier. But while Scoot waits for its mix of 787-9s and 787-8s, competitors could pursue faster expansion, leaving Scoot with a smaller slice of Asia’s emerging low-cost medium/long-haul market.
Recently reported comments from Germanwings CEO Thomas Winkelmann draw attention to transitional IT issues and its costs relative to competitors. This highlights the challenges in scaling up its operations and redefining its product and pricing in order to become Lufthansa’s vehicle for all non-hub European traffic.
Lufthansa has gained several years of experience in owning a low-cost carrier, even if it was run fairly autonomously for much of that time, and aims to combine this with its expertise in premium travel to return its non-hub short/medium-haul business to profit. But will it have the right combination of product/service quality and low costs?
Our analysis suggests that, while Germanwings’ unit costs are well below those of Lufthansa, the cost gap to other LCCs is even greater. In addition, its unit revenues are further below those of Lufthansa than are its unit costs. It also faces a significant operational challenge in growing from 7-8 million passengers to its 20 million target in 2015, while improving Lufthansa’s short/medium-haul earnings by EUR200 million.
The Lion Air Group has a massive 600 aircraft on outstanding order following its landmark order for 234 A320 family aircraft, which was signed on 18-Mar-2013. The figure at first glance seems overly ambitious given the intensifying competition in Southeast Asia’s low-cost carrier market. But Lion enjoys a very strong position in its massive and fast-growing home market of Indonesia, which could easily support, over the next decade, at least half of the additional aircraft it has committed to acquiring.
Lion also has ambitions of establishing new affiliates and subsidiaries, following the model of rival LCC group AirAsia. The Lion Air Group is launching Malindo, a joint venture carrier in AirAsia’s original home market of Malaysia, on 22-Mar-2013.
The group also has the option of placing some of the 600 aircraft it has on outstanding order with airlines outside Lion through its new leasing subsidiary. This gives Lion unique flexibility should its growing portfolio of airlines not require all 600 aircraft for their own growth and replacement needs.
Aviation is a heavily regulated industry where transformative changes are seldom and slow. However, recently the industry is witnessing powerful winds of change that have shaken its foundations - but most importantly helped the industry realise the degree of power that lies in the hands of customers.
Customers now have ‘any time- any where’ access to Information & Technology tools that allow them to not only make informed decisions but also give them the opportunity to express their changing needs. Given the variety of airline choices available to the customer, not addressing customer needs translates to an empty seat!
The mantra for growth and sustainable profits is in-depth understanding of your customer needs and incorporating the same in your business.