easyJet banking on airline failures as bleak Winter looms

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easyJet is one of a handful of well positioned European carriers that is set to increase its market share this Winter as its rivals reduce capacity or exit the market. The massive spike in the price of oil on 22-Sep-08 back above USD120 per barrel could accelerate the process of change in Europe.  easyJet CEO, Andy Harrison, stated recently, "I'm pretty certain easyJet will win market share from airlines that cut back or disappear, while as economic pressures (on passengers) increase, we should win market share from the legacy airlines".

Mr Harrison believes fare increases over the Winter Schedule are “inevitable”, and that higher oil prices will continue to mean further capacity cutbacks and airline bankruptcies. The carrier also expects increased fares to result in the substitution of European leisure traffic from long-haul to short-haul. Overall, easyJet, expects its share of the European short-haul market to rise from 6-7% to 10% in the next three to four years.

But the process will be painful.

Like British Airways (BA), easyJet is heavily exposed to the meltdown in the financial sector and general weakness in the UK economy, with a 13.9% share of total London area airport capacity (Gatwick, Heathrow, Luton, Stansted and London City combined), behind BA (25.8%), and slightly ahead of Ryanair (13.1%).

Total capacity share (seats) for London airports*:
Week commencing 22-Sep-08

*Share of Gatwick, Heathrow, Luton, Stansted and London City airports total capacity combined
Source: Centre for Asia Pacific Aviation and OAG

Sees reduced Winter demand and lower unit revenues

easyJet forecasts a 2-4% reduction in industry-wide passenger traffic in the upcoming Winter season, and total revenue per seat to moderate in the Winter months, due to the worsening consumer environment in the UK and the strength of the Euro. It emphasised that it is “too early to anticipate” the impact on yield of the expected industry capacity reductions.

To minimise the negative impact on its own profitability, easyJet has reduced its growth plans for the European Winter, with capacity to be in the “low single digits”. The carrier previously stated capacity growth for Winter 2008/09 was planned to be in the range of 4-6%, compared to its previous annual growth rate of approximately 10% p/a.

As part of this capacity reduction, easyJet is trimming operations at less profitable times and locations, with capacity relocated from weaker performing bases towards higher value opportunities, including London Gatwick, France and Italy. According to easyJet, in the current difficult operating environment, flexibility is vital and the carrier will continue to review its schedule and may make further adjustments both to eliminate unprofitable routes and to seize any opportunities that may arise as capacity exits the market.

The carrier added it has not ruled out a capacity freeze over Summer-09. The airline is also considering eliminating 45 older and leased aircraft from its 165-aircraft fleet, although it currently has no plans to defer delivery of 119 aircraft on order from Airbus. This order means the airline will double in size in the next five years after it accelerates the phase out of its fleet of 30 B737-700s and rationalises the GB Airways “sub-fleet”. 

Outlook: ‘Laws of the jungle’ prediction playing out

As the economic storm intensifies, easyJet is confident of capitalising on its strong market position and gaining premium traffic from its network rivals, but it also faces a militant Ryanair at the bottom end of the market intent on keeping people traveling amid a recession with deeply discounted fares.

There have been significant reductions in premium demand within Europe reported by IATA-member airlines, although the industry body recently noted that while there is likely to have been some switch in business travel from premium to economy, “all the evidence suggests this is a relatively price-insensitive sector”. In other words, business travelers (including the financial sector participants that retain their jobs) are likely to continue to offer reasonable yields. Capturing them away from the network airlines remains the key challenge for carriers like easyJet.

easyJet will rely on its lower cost base and large cash reserves to leverage a competitive advantage over higher-cost rivals. As some of these players exit, the likes of easyJet will benefit – it merely becomes a question of when.

Overall, easyJet, like Ryanair, believes high oil prices and a slowing economy will lead to “massive” consolidation in Europe, leaving only five major carriers in the region: British Airways, Air France-KLM, Lufthansa, Ryanair and easyJet. While the stronger carriers will survive and, in the long-term prosper, Europe’s weaker carriers will, according to easyJet, “downsize and disappear”, as the “laws of the jungle” play out under high fuel prices and continued expansion by the leading LCCs. The application of those laws appears to be accelerating.

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