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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Pegasus Airlines: 1Q loss grows; pricing comes under pressure from capacity growth and macro factors
In 1Q2016 Pegasus suffered another fall in its operating margin, after being one of only a very small number of listed European airlines to experience margin contraction in FY2015.
The main cause of this slide in profitability for Pegasus is unit revenue weakness, which is partly due to external macroeconomic and geopolitical factors, and partly due to its own rapid capacity growth. Low fuel prices have not been a sufficient influence for Pegasus to lower its unit cost enough to offset falling unit revenue. Low fuel prices have actually even contributed to low unit revenue – by encouraging competitor capacity growth.
Pegasus' unit cost is around one third below that of its biggest competitor Turkish Airlines and one of the lowest in Europe. This gives its business model some robustness against weak pricing, but this environment also places greater pressure on its cost base.
Leaders of North Asia’s low cost carriers (LCCs) will gather in Narita on Jun-7/8 for CAPA’s North Asia LCC Summit.
Hosted by Narita Airport, the Summit marks 12 years of CAPA’s flagship series of LCC events in Asia and marks CAPA’s second return to Japan.
Featuring over 40 speakers, including senior executives from all of North Asia's LCCs, and with simultaneous translation in English, Japanese, Korean and Mandarin, the Summit will explore the commercial drivers for LCC growth in this region, as the market opens.
North Asia has yet to experience the rapid expansion of LCCs that has occurred in Southeast Asia - but that is changing quickly.
Air Serbia's transformation from the loss-making carrier Jat Airways in 2013 to one with the possibility of sustainable levels of profitability took another step forward in 2015, with another positive result. After receiving investment from Etihad and the Serbian government in 2H2013, it had recovered from heavy losses to a small profit in 2014. This was based on an impressive reduction in unit cost, with a realignment of the network and its commercial positioning.
In 2015 Air Serbia again increased its net profit, although this remained slim at only 1% of revenue. Buoyed by its success in establishing a track record of positive results, Air Serbia is growing its European network. Perhaps more significantly, it is also launching its first long haul route, Belgrade-New York, this summer.
Its unit cost is efficient versus legacy airlines and not very much higher than LCCs such as easyJet. It has the good fortune to face only a relatively small amount of competition from LCCs (it only has competition from any other airline on a minority of its routes). However, the ultra-LCC Wizz Air, which has a much lower unit cost than Air Serbia, is its leading LCC competitor and could provide a greater threat over time.
Most airlines in Europe make losses in the winter. It was a sign of the strength of easyJet's business model and the success of CEO Dame Carolyn McCall's leadership that its 1H loss (Oct to Mar, coinciding with the winter) narrowed every year from FY2011 until it made a profit in 1H2015. Alas, its return to loss in 1H2016 puts it back among most airlines in this respect.
The airline's FY2016 outlook is slightly more positive; all its profits come in 2H, the summer, and modest earnings growth is expected. Moreover, its high margins set it apart from most airlines, as does its plan to pay 50% of net profit as dividends to shareholders.
The deterioration in easyJet's 1H result was due to falling unit revenue – a persistent problem. In spite of lower fuel prices, cost per seat did not fall fast enough in 1H to offset this. Revenue per seat was adversely affected by geopolitical events and currency movements, but it is becoming increasingly apparent that easyJet faces a challenge to grow its revenue per seat. Its load factor is already about as high as it can get, and easyJet is currently unable to drive pricing up.
Among airports in Germany's Top 10 by passenger numbers, Berlin Schoenefeld was the fastest-growing in 2015. After declining between 2010 and 2013, its traffic then grew by 27% over two years. In the first three months of 2016 passenger numbers have grown by a further 43% year- on-year.
Berlin Schoenefeld is the smaller of the two airports in the Berlin system, yet its growth vastly outpaces the low single-digit rate of Berlin Tegel. Already an important base for easyJet in Germany, Schoenefeld has experienced recent rapid growth that has been mainly the result of expansion by Ryanair. Wizz Air has also entered Schoenefeld in 2016. Although easyJet's growth is much slower, it has announced that it will increase the number of aircraft based at the airport from nine to 10.
At the same time airberlin, based at neighbouring Tegel, is losing market share in the Berlin airport system. Although Germanwings is gaining share, this is merely substituting for its parent Lufthansa. By the situation at Schoenefeld, Berlin is a good illustration of how LCCs continue to take share from legacy airlines on intra-Europe routes.
TAP Portugal's new shareholder Atlantic Gateway Consortium, which includes David Neeleman, the Chairman of Brazilian LCC Azul, has prompted a number of changes. Atlantic Gateway's investment in Nov-2015 has led to a commercial relationship with Azul, giving TAP customers access to domestic destinations in Brazil and giving Azul customers access to TAP's Brazil-Portugal network. There are also signs that the two will reshuffle some routes between them as Azul commences European flights. Moreover, TAP will benefit by receiving aircraft previously ordered by Azul.
Although Atlantic Gateway originally took a 61% stake, it was subsequently agreed that this would be scaled back to 45%, with the Portuguese government regaining a 50% holding and 5% available for employees. An intriguing prospect now is that the Azul shareholder HNA Group may also become a TAP shareholder directly.
TAP reported a loss for 2015 but its ownership and long haul development are more assured now than for some time. Nevertheless, the erosion of its market share on European routes is an ongoing threat. The CEO of Ryanair, which is number two to TAP on Portugal-Western Europe, recently claimed that his airline would overtake it in Portugal in the next couple of years. A strategy to counter this threat is vital.