I’ll apologise straight away for including the word ‘Easter’ a lot in the following article. It’s not that I have anything against it, but the meanderings of the holiday season between the first two quarters of the year do have a significant impact on how each quarter performs individually. Maybe in future we’ll just run an article covering the first half-year so Easter won’t have any bearing on the results. But what would be the fun in that?
So, here we are again at the start of another year for Europe’s LCCs, and for that matter everyone else. The first quarter is usually rubbish, a sea of red ink as most carriers park-up their fleets and avoid doing as much flying as they possibly can. For those that do venture out, finding passengers who are willing to pay with money isn’t easy, unless of course it’s to a ski destination in the school holidays.
The performance of the LCCs in the first quarter last year set the bar quite low, returning combined losses not far short of EUR 600 million, possibly the worst combined LCC quarterly result ever. The timing of Easter (sorry) this year should help out, so hopefully the airlines will get off to a better start in 2018.
So in this spirit of hope, let’s look at the numbers.
Q1 seat capacity and growth vs 2017
The total number of seats offered by the main LCCs came to around 89 million in the first quarter, which is a 10% increase over 2017, and in absolute terms saw around 8 million seats added to the market. That actually represents a modest slowdown from 2017, when the airlines added nearer 9 million new seats, though probably not grounds for too much concern.
EasyJet and Wizz Air added the highest number of new seats into the market, as Ryanair reported lower growth than usual, likely as a result of pilot shortages and industrial action spilling over from Q4 last year. Despite this, Ryanair and easyJet remain the two largest airlines in Europe for intra-European services, both in terms of capacity offered and number of departures, with around 55% of the market between them.
Wizz Air’s growth saw them leapfrog Vueling to become Europe’s fourth largest LCC, despite Vueling also recording significant growth during the quarter. Unrest and strikes across France in the first quarter dampened growth at Transavia, so although they lost ground in size versus their competitors during the period, not adding seats in the least profitable quarter isn’t necessarily a bad thing.
Fortunately for the airlines, passenger numbers held up, so all of those extra seats were filled. The airlines added around 8.5 million new passengers during the first quarter, bringing the total for the period to 78 million passengers; this is around half a million passengers more than they added in the same period of 2017. The combination of fewer new seats but more new passengers meant that load factors were on the up, rising by almost two points to an average of 87.5%.
Turning now to the financial performance of our LCCs, and as mentioned previously the quarterly performance the first half of the year depends very much on when Easter falls (sorry). In 2016 it was in the first quarter, last year it was in the second, while this year it was on April 1st, neatly bisecting the two quarters. It’s therefore a little difficult for us to make like-for-like comparisons, as none of the last three years exhibit a common set of conditions. But it’s safe to say that the nearer Easter is to Q1, the better we would expect Q1 performance to be, buoyed by all those holiday passenger, so this year probably ought to be better than last.
And the initial numbers look encouraging. As the chart below shows, average revenue per passenger certainly suffered in 2017 (the left-hand arrow), falling by 10% as Easter moved into Q2 and took all of the good news with it. However, as the arrow on the right shows, 2018 was a different story.
Q1 change in revenue and profit per passenger
As could be expected, Easter sprinkled a little fairy dust on Q1 this year, giving back some of the drop in per passenger revenue experienced in Q1 last year. Perhaps slightly less than airlines had hoped for (something over 5% would have been nice), but nevertheless a revenue per passenger increase in excess of 3% is a step in the right direction for the LCCs.
However, there’s also an indicator here that cost increases were a little sporty too. Fuel prices have been on the rise (though hedging may still be insulating some carriers from the full increase) and one or two carriers have reported cost control issues, and this is manifesting itself in the ‘loss per passenger’ figure shown. Despite the healthy increase in revenue per passenger, and the increase in absolute passenger numbers, the loss per passenger only improved by just over one Euro. Not great.
Now it’s not surprising that most LCCs made losses in the first quarter, that’s what normally happens. With the timing of Easter more benevolent this year, it was hoped that 2017’s substantial Q1 losses could be pared back, but sadly that doesn’t look to be the case. This chart shows the profits, OK, losses (Ryanair excepted), made by the LCC airlines in millions of Euros, with the blue bars showing the results for Q1 2018, and the grey bars showing the corresponding results for 2017.
Estimated Q1 LCC profit in 2018 and 2017
Well, Ryanair still made a profit, and although it’s slightly down on what they achieved last year, it’s not a bad performance in the context of capacity cuts, pilot shortages and industrial action.
Looking on the bright side, Easyjet’s results were much better than they were last year, and both Wizz Air and Transavia also look to have improved their first quarter performance. Interesting that Wizz Air did it by posting the largest percentage growth of any LCC, while Transavia’s growth was amongst the lowest.
At the other end of the scale, both Eurowings and Norwegian turned in a worse performance than last year. Issues at Eurowings concern the widely-reported digestion of airberlin assets, significantly increasing the size of the airline in a very short space of time, and at a time of year when more seats aren’t really all that helpful. Norwegian’s poor performance is also related to strong growth, but this time it’s perhaps more structural, as the airline has been going through a difficult period for a number of quarters. Hopefully both carriers will find things easier in Q2.
By combining this set of individual airline results we can see how the LCC sector performed overall in the first quarter. For those of a nervous disposition, please look away now. As I might have already mentioned, the timing of Easter has a big impact on how each of the first two quarters perform. In 2016, the grey bar in the chart below, it fell towards the end of March, so Q1 losses were reduced thanks to Easter holiday traffic. Last year it fell in late April, and the blue bar shows that the sharp drop in average revenue per passenger we saw earlier pushed the quarter into a significant loss.
Estimated profitability by quarter, 2016-2018, and by month for Q1 2018
With Easter falling almost between the quarters this year, it would have been good to see an improvement in first quarter results, but as the previous charts indicate, this hasn’t happened. As can be seen by the pink bar on the chart, we think that Q1 2018 actually turned out to be slightly worse than the first quarter in 2017.
The smaller chart at the bottom right of the graphic suggests that Easter did have a positive impact on the numbers. This shows the estimated profitability breakdown by month during the first quarter. We think that January was dreadful, it’ll probably be the worst month of the year, but by March the LCC group had almost reached breakeven.
Returning now to the left-hand chart, Q2 is normally when the year picks up, and in both 2016 and 2017 profits in the second quarter outweighed the losses experienced in the first. Last year (the blue bars) the swing was significant, with a clear no-Easter/Easter demarcation in performance between the two quarters. This year, if revenue per passenger continues to improve, and more passengers travel despite the various strikes and disruptions blighting the industry at present, we can expect a strong Q2 revenue performance from the LCCs. But unless the likes of Eurowings and Norwegian can rein in their costs, it’s possible that unlike in previous years, Q2 performance may not deliver a positive overall outcome for our LCC group in the first half of the year.
Route Level Economics
The LCCs between them flew over 4,400 unique airline/route combinations in the first quarter (that’s around 85% of the number flown in full-year 2017), mainly intra-European routes but of course into North Africa and further afield with a growing long haul network.
Estimated route performance in Q1 2018
Not surprisingly, based on the figures we’ve reviewed so far, our analysis suggest that only about one in six LCC routes were comfortably profitable in the first quarter, so those we think had a profit margin of 10% or better. If we include a share of those that we consider to be around the positive side of the breakeven point, it’s likely that at best only around 25% of LCC routes were profitable during the quarter.
At the other end of the scale, we estimate that fully 65% of routes were comfortably loss-making, so those with a profit margin of -10% or worse. Again if we include a share of those on the negative side of breakeven, then we estimate that around three quarters of all LCC routes were loss making in the first quarter.
It is a little disappointing that most LCC routes will start the new year losing money, and networks will have shrivelled back as the carriers enter some form of partial hibernation. But at least the performance in the first quarter is often mirrored in the second, with the deeper the loss, the higher the subsequent profit. Did I mention the timing of Easter? Whilst we can’t yet make accurate predictions as to how the next quarter will pan out, we can take a view as to how average fares are trending in the market in Q2, and how that compares with what happened in previous years.
The chart below shows the estimated average fare across the top 100 European LCC routes (by capacity) by month for the first half of each year from 2015 onwards. At the beginning and the end of the period average fares are bunched reasonably closely together, but in-between the effects of the timing of Easter and increasing competition make for a far less ordered picture. The late Easter in 2017 clearly helped April’s numbers that year, while the early Easter in March 2016 had the opposite effect. Increasing competition took its toll, with both 2016 and 2017 struggling to get back to 2015’s average fare levels throughout.
The fare analysis confirms the weak start we’ve seen to 2018, with January fares little changed from previous years (and still below those achieved in 2015), but also supports what we have seen in the overall airline results, with March recording double-digit average fare increases to match the strong increase in passenger revenue growth.
Estimated average fare, top 100 European LCC routes by capacity
Our estimates for Q2 suggest this recovery will continue, with a modest improvement in April’s average fare of up to 5% relative to last year, but May fares could be up by as much as 20% relative to May last year. We then expect June’s fares to return to a level of around 5% up on last year, moving back towards the low-mid EUR 50s seen in previous years, but even so the analysis suggests the LCCs could be in for a better Q2.
Overall, we’re anticipating that LCC revenues could be up by around 20% relative to Q2 last year, with airlines on average adding around EUR 5.00 to their Q2 2017 per passenger yields. If key airlines can achieve better cost control in Q2, then it’s possible that profitability for the group might exceed the almost EUR 800 million that they made in Q2 2017. But that can’t be guaranteed.
The numbers are slightly disappointing on the whole, given that Easter should have provided more of a lift. It may even be the worst LCC quarterly performance ever. Some carriers did reasonably well, maintaining a profit or cutting losses, but others had a fairly horrible start to the year. Significant losses at both Eurowings and Norwegian widened, but the former can rely on the deep pockets of Lufthansa, and can put additional costs down to the opportunistic acquisition of large parts of airberlin. Norwegian is, as yet, without a significant other, and losses are organic rather than one-off in nature. Worrying times in Oslo? But for all the LCCs, it’s good to get Q1 out of the way, now the work starts to repair the damage.