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The Aegean Airlines group suffered another fall in its operating result in 1Q2016, when winter losses widened. As is the case for almost every other European airline, it suffered a fall in unit revenue. However, whereas many others managed to lower unit costs at a faster rate, Aegean's cost efficiency gains were not enough to offset the RASK decline, in spite of lower fuel prices. This adverse RASK versus CASK trend seems to have established itself and Aegean has now had six successive quarters of contraction in its operating margin.
One of Aegean's biggest structural challenges is the high degree of seasonality in its business. The summer quarters, particularly 3Q, are much more significant than the winter to its capacity and traffic and must generate sufficient profits to offset winter losses. Moreover, the extent to which Aegean depends on a strong summer is growing.
By contrast with Aegean, ultra LCC Ryanair, which is the second largest airline in Greece, is now enjoying year-round profitability and margin expansion. Ryanair is matching Aegean's overall rate of growth in Greece and gaining market share in the domestic market. Aegean is unlikely to see an end to downward unit revenue any time soon.
Wizz Air: more strong FY results for ultra-LCC. A321 to solve problem of further unit cost reduction
Wizz Air's second annual results since its Feb-2015 IPO show it going from strength to strength. Almost all the key indicators moved positively in FY2016. Capacity and revenue grew rapidly once more and load factor went up. Wizz Air's market share in Central/Eastern Europe increased. Net profit was higher and operating margin expanded. Moreover, unit cost fell.
However, behind the headlines, Wizz Air cannot sit back and relax. Firstly, after years in which unit revenue was driven by strong ancillaries compensating for weak ticket pricing, total RASK fell in FY2016. Ancillaries remained strong, but not strong enough to offset falling fares. The RASK outlook remains weak. Secondly, unit cost only fell because of lower fuel prices. Ex fuel CASK has barely moved for six years and is already the second lowest in Europe. It is difficult to cut non-fuel costs further (although containing them, as Wizz Air has done, is a creditable achievement).
Of course, well-managed companies do not sit back and relax. Wizz Air's is building its future on the A321, whose greater seat count will give lower unit costs versus the A320s. Wizz Air judges that this unit cost benefit will compensate for the larger aircraft's dilutive impact on yield.
Ryanair achieved another strong increase in net profit in FY2016, following up on FY2015's 66% growth with a 43% gain. Passenger growth accelerated to 18% – its highest rate for seven years, helped in no small measure by a second successive 5ppt gain in load factor, taking it to 93%.
This was achieved with only a 1% fall in average fares, demonstrating the success of the customer service and network improvements that Ryanair has introduced over the past two years under its 'Always Getting Better' programme. Overall, Ryanair managed the rare combination of an increase in revenue per seat and a fall in cost per seat (although the latter owed much to lower fuel prices). This gave it its highest operating margin since FY2005.
Looking into FY2017, Ryanair expects profit growth to slow down, but at a figure around 13% it still aims for a double-digit rate. Moreover, it is likely to retain its position as the airline with Europe's highest operating margin.
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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.
Turkish Airlines suffered a wider operating loss in the 1Q2016. Its capacity growth, consistently at double-digit rates, is accelerating in 2016 as it pursues new markets and increases frequencies – particularly in the US and Africa. However, its load factor slipped by 2.9ppts and its total revenue per ASK fell by 17.2%.
Demand was weakened by the aftermath of geopolitical events but there are also gathering macroeconomic uncertainties in Turkish Airlines' markets, which increasingly embrace the globe. This highlights the risks associated with very high capacity growth when the robustness of demand is faltering. Although its unit cost also fell (thanks to lower fuel prices), this was not sufficient to offset the drop in unit revenue.
Turkish Airlines strategy of high growth, based on the geographic advantage offered by its Istanbul hub in attracting global transfer traffic, now ranks it among the world's leading airlines. Although the seasonally weak 1Q may not be a reliable guide to FY2016, the airline will need to generate improved trends in load factor, RASK and margins over the rest of the year if it is to assuage concerns that it is pursuing growth at the expense of profitability.