European Airlines: 2020 outlook characterised by uncertainty

Summary

• Europe's 3.1% seat growth in 2019 is the lowest since 2013; it is slowing further this winter. East/Central Europe growth continues to outpace West Europe.
• IAG is outpacing Lufthansa and Air France-KLM. Turkish Airlines has been slowed by 737 MAX delays, while Aeroflot's growth remains strong.
• LCC growth in 2019 is the slowest for at least a decade, but is still faster than FSC growth. MAX delays are slowing Ryanair's 2020 growth.
• EasyJet's capacity is flat this winter and Norwegian has gone into reverse, but Wizz Air is outpacing all other top 10 groups in Europe.

Seat growth in Europe in 2019 at 3.1%, is the lowest since 2013 and slowing further this winter

Airline seat capacity in Europe is up by 3.1% in 2019, according to data from OAG Schedules Analyser (the source for all capacity data in this report).

This represents a slowing of growth compared with 2018's 6.6% increase and is the lowest growth rate since 2013, when seat count grew by 2.7%. It is below Europe's 10 year compound average rate of 4.5% pa between 2009 and 2019.

International capacity, which accounted for 76.3% of the total in 2019, is growing slightly faster, by 4.3%, whereas domestic capacity growth has fallen by 0.4%.

Europe's winter 2019/2020 capacity growth is set to slow to 1.1% year-on-year.

Eastern/Central Europe's growth continues to outpace Western Europe's, but both are slowing down

Growth in Eastern/Central Europe, at 6.2%, is again running faster than Western Europe's 2.1% in 2019.

Nevertheless, the slowdown is affecting both parts of the continent. In 2018 Eastern/Central Europe grew seats by 12.7% and Western Europe by 5.2%.

In winter 2019/2020 Eastern/Central Europe's capacity will grow by 4.9% and Western Europe's by just 0.5%, year-on-year.

Lufthansa Group, number one by seats, is growing modestly

Lufthansa Group is again Europe's biggest airline group by seats in 2019, which has been a year of consolidation for the group and the first in a while when it did not work on integrating a new acquisition.

The group's seat capacity is up by 2.0% in 2019, slower than the 9.4% increase of 2018 when it took on additional capacity from the defunct airberlin.

According to the CAPA Fleet Database (the source for all fleet data in this report), the Lufthansa Group is due to take delivery of 45 new aircraft in 2020, compared with 37 in 2019. This represents 6% of its current fleet and, allowing for replacements, this points to another year of modest growth in 2020.

In winter 2019/2020 Lufthansa Group is scheduled to reduce its capacity by 1.4%, according to OAG data.

Following yet another extension of the deadline for binding offers for Alitalia - this time to 21-Nov-2019 - Lufthansa could possibly return to the bidding, but this is unlikely to be a high priority.

IAG is slowing its growth, but still outpacing Lufthansa Group and Air France-KLM

IAG is number two among Europe's big three legacy groups (but number three overall in Europe, behind Ryanair). Its 2019 seat capacity is up by 3.6% (after 5.8% in 2018), which is similar to its 4% ASK growth target.

Following a profit warning in Sep-2019 - prompted by pilot strikes at BA and lower demand for its LCC brands - IAG lowered its 2019 ASK growth plans from 5% planned in Aug-2019 and 5.9% at the start of the year.

Capacity growth plans have been trimmed for all of IAG's airlines since the start of 2019.

It has 60 new aircraft due for delivery in 2020, compared with 42 in 2019, but a further slowing of capacity growth affecting 2020 is likely to be announced by IAG.

In winter 2019/2020 IAG's seat count is set to grow by 2.6%.

In spite of its reduced growth rates, IAG is still growing faster than its other major European legacy group rivals.

Air France-KLM's capacity is stagnating

The third major legacy group, Air France-KLM, is more or less treading water in 2019, with seat growth of just 0.4%. Among Europe's top 10 groups, only Norwegian is growing at a slower rate in 2019 (it is cutting seats by 5.6%).

Air France-KLM's winter 2019/2020 seat capacity plans are just below flat (-0.3% year-on-year) and it has only four new aircraft due to be delivered in 2020 - a reduction from 12 in 2019.

Turkish Airlines has slowed to lowest growth rate in well over a decade

The largest group in Central/Eastern Europe, Turkish Airlines, slowed its annual seat growth from 7.4% in 2018 to just 1.1% in 2019, which has been its lowest rate for at least 15 years. Its growth has been affected by the MAX grounding.

Turkish's winter 2019/2020 seat count is set to rise by 4.7%. It expects a total of 64 new aircraft deliveries in 2020, compared with 37 in 2019.

The 2019 deliveries up to 29-Oct-2019 included five 737 MAX-8s, of which it has a total of 12 now grounded, 13 due for delivery in late 2019, and 23 due in 2020.

Aeroflot has the second fastest growth in Europe's top 10

Aeroflot Group's seat capacity is growing at 8.8% in 2019, the second fastest rate among Europe's top 10 groups (behind Wizz Air). Passenger numbers grew by 11.4% in the first eight months of 2019.

The group's 10 year compound average seat growth rate, 14.7% pa, is also the second fastest among the top 10 (also behind Wizz Air).

Aeroflot Group will continue pursuing its goal of reaching 90 million-100 million passengers by its 100th anniversary in 2023 (from 55.7 million in 2018). This includes the accelerated expansion of its LCC subsidiary Pobeda to 25 million-30 million by 2023 (from seven million in 2018).

It expects 32 new aircraft deliveries in 2020 (including nine 737 MAXs out of 20 on order), compared with 15 in 2019 (including three MAXs due in Dec-2019).

Europe's LCC growth in 2019 is the slowest for at least a decade

LCC seat capacity is up by 4.1% in 2019 - again, faster than legacy airline growth of 2.7%, but the slowest LCC growth rate in at least a decade.

LCC share of total seat capacity in Europe is up again in 2019, but at 33.1% in 2019 versus 32.8% in 2018, the annual increment is only 0.3ppt. This compares with an average increment of 1.2ppts pa since 2009 (when LCC share was 21.4%).

Ryanair, Europe's biggest LCC group, will slow growth in 2020 due to 737 MAX delays

Ryanair Holdings is Europe's largest LCC group by 2019 seat count (and the number two airline group overall), a position it has held for many years.

In 2019 its capacity is up by 8.0%, almost matching 2018's 8.1% growth and ahead of its 10 year average rate of 7.1% pa.

However, its winter 2019/2020 seat growth is set to slow to 5.8%, and in Jul-2019 Ryanair reduced its planned summer 2020 capacity growth from 7% to 3% because of delays to its 737 MAX delivery schedule. Its original plan envisaged 58 incremental aircraft in summer 2020, but this was reduced to 30.

It has 135 confirmed MAX 8 orders with deliveries expected by 2024, of which three are now due in Dec-2019, if deliveries resume, and 26 in 2020.

For Ryanair's new holding company structure, sitting on top of the group companies Ryanair, Ryanair UK, Laudamotion, Buzz and Malta Air, 2020 will be its first full year of operation.

In summer 2020 Buzz and Malta Air will join Laudamotion in having their own liveries.

EasyJet's capacity is flat this winter

EasyJet is Europe's number two LCC group and number five airline group overall. Its 2019 seat count is up by 5.6%, which is a slowdown from 13.4% in 2018 and is its lowest growth rate since 2014 (when growth was 4.8%).

Its winter 2019/2020 capacity growth is set to slow to a virtual standstill, just 0.2%, but it is due to take delivery of 29 new aircraft in 2020, compared with 20 in 2018.

Norwegian has gone into reverse growth as it fights to restore profits

Norwegian Group, Europe's third largest independent LCC group, is cutting seat numbers by 5.6% in 2019 (although its ASK guidance is flat).

This contrasts with its 14.4% growth of 2018 and 10 year compound average rate of 11.6% pa from 2009 to 2019, and reflects its strategic move away from growth in an attempt to restore profitability after losses in 2017 and 2018 and another expected in 2019.

Seat capacity data for winter 2019/2020 indicate a cut of 21.7% year-on-year and the group has said that it expects an ASK reduction of 10% for the whole of 2020.

Norwegian has 18 grounded 737 MAX aircraft as at 29-Oct-2019, with eight due for delivery in Dec-2019 (but Norwegian does not expect a return to service before 2020) and a further 16 expected in 2020.

If MAX deliveries resume by Dec-2019, Norwegian will have a total of 14 deliveries of all aircraft types in 2019, rising to 22 in 2020.

However, the group has more aircraft in the pipeline than it needs, and has reached agreements to sell 17 aircraft due for delivery in 2019 and 2020. It has also agreed with China Construction Bank Leasing to establish a joint venture company (only 30% owned by Norwegian) to take 27 new aircraft from 2020 to 2023. These actions are helping to improve Norwegian's liquidity and remove unwanted capacity.

Norwegian's fleet almost doubled from 2013 to 2018, but it expects the fleet to remain broadly at its total of 164 aircraft (at the end of 2018) through to 2021.

Wizz Air is outpacing all other top 10 groups in Europe

Europe's number four independent LCC and overall number 10 airline group, Wizz Air, is growing seat numbers by 16.3% in 2019 - the fastest in the top 10. This matches its 10 year average growth rate of 16.2%, also the fastest in the top 10.

Its planned winter 2019/2020 seat growth rate of 22.0% suggests that it does not plan to slow down in the near future. It has Europe's biggest aircraft order book - 249 outstanding confirmed orders at 29-Oct-2019 - and expects 23 deliveries in 2020, compared with 17 in 2019.

2020: both capacity and demand uncertainties

According to the CAPA Fleet Database, the total number of aircraft deliveries due in Europe in 2020 is 456, which is an increase from 406 in 2019 and above the typical range of 300 to 400 over the past five years.

In terms of seats delivered, the number is set to increase to almost 91,000 in 2020, compared with 77,000 in 2019 and a five year in the range of 50,000 to 75,000.

Expected 2020 deliveries represent 7.6% of seat numbers in the current European fleet in service (at 29-Oct-2019), compared with 6.4% expected in 2019.

If the currently grounded 737 MAX fleet of 78 aircraft returns to service in 2020, this represents a further 1.2% of total seats. Potentially, therefore, additional capacity representing 8.8% of current seats could enter service in 2020, before taking account of retirements.

Conversely, 737 MAX deliveries due in 2020 represent 2.2% of seats, and if no MAX deliveries were to take place in 2020, the new capacity entering service would be 5.4% of current seat numbers.

A range of important unknowns

This highlights the importance of two unknowns in predicting total capacity growth in 2020: the timing and extent of the MAX's return to service and the number of retirements from the fleet in Europe.

The slow rate of capacity growth in winter 2019/2020 - assisted by cuts by Norwegian and smaller operators such as Flybe and the disappearance in 2019 of operators such as Thomas Cook Airlines, Germania and WOW air - suggests that Europe's airlines are taking a cautious approach to capacity in an environment of slowing economic growth and increasing global trade uncertainty.

However, the macroeconomic environment, which is the fundamental driver of demand for air travel, is increasingly uncertain. In Oct-2019 the IMF shaved its Euro area GDP growth forecast for 2020 to 1.4% from an already slow 1.5%.

Macroeconomic uncertainty causes include the Trump Administration's trade policies, fuelling US-China trade tensions and leading to US-EU tariff increases, in addition to Brexit uncertainties. In addition, growing environmental awareness among consumers is a growing risk to air travel demand; this will increasingly influence demand, but its impact in 2020 will still be limited.

If capacity discipline holds, and if jet fuel prices do not climb once more, European airline profitability could prove to be robust in 2020. However, there is a wide range of possible outcomes for both capacity and demand.