A Year in the Life of Europe’s LCCs

The expected consolidation of the LCC business in Europe hasn’t really happened. Indeed, recent moves by Europe’s majors will see more and more airlines try to turn themselves into LCCs, though whether they can achieve the L and the C and remain profitable is yet to be determined. Almost by definition, LCC will soon be a redundant term, as most international carriers flying routes within Europe will be styling themselves as LCCs, and thus one day they will all revert back to being merely Cs.

Given the desire for most short-haul airlines to call themselves an LCC, it’s worth finding out whether or not being an LCC in the current market environment is an attractive place to be. Are they making money? Are they growing passenger numbers? Will Ryanair ultimately eat them all up, and does lowest cost always win?

Here at RDC, we’ve invested time and effort into trying to answer these questions, and others we hadn’t even thought of at the time. Our new Apex Profitability module contains estimated route-by-route revenues for nine European LCCs, between them responsible for over 2m departures and over 300 million passengers in 2016.

The scale of the business

Business is certainly on the up. The nine airlines carried around 315 million passengers during 2016, a 13% increase over the 279 million passenger carried in 2015. Capacity was also on the rise, fuelled partly by the move into long-haul flying, with the number of seats on offer up by 12% to almost 360 million; as a result, average load factors increased only marginally, from 87.3% to 88.1%.

Graph showing airline passengers in 2015 v's 2016

Between them, Ryanair and easyJet control around 61% of the market, with Ryanair moving from 36% to 37% as easyJet lost a little ground during the year. This share that held steady from 2015 as all nine airlines grew their passenger numbers in 2016; indeed, market share across the airlines remained remarkably similar between 2015 and 2016  

The reach of LCCs also continued to climb, with 8,300 unique routes offered during the year, an increase of more than 5% over 2015. However, competition between carriers on the same route is also a growing trend; in 2016, there were 33% more routes offered by two or more carriers than there were in 2015.

The state of the business

So, what does all that activity add up to; is it worth being a member of the LCC club? Well, on balance, yes it is. More of these airlines are profitable than not, and some are managing to grow their profits too.

In 2016, our figures suggest that our airline group had a profit margin of around 11%, and that around 68% of the routes operated were profitable at the operating level. Taken together, the airlines included in the analysis produced an operating profit of almost EUR 2.6 billion, though Ryanair alone contributed around 60% of that figure. Three of the airlines – Eurowings, flybe and Transavia - were either loss-making, or just managed to break even (excluding non-flying activity, currency gains/losses, exceptional items etc).

Graph showing percentage of routes and profit margin

Similar analysis of the figures for 2015 showed that our airline group had a profit margin of 12.6%, and that around 72% of routes were profitable. So despite the continued growth in the sector, not all was well, as fewer routes made money and profitability was lower than in 2015. Why so?

Well, the usual culprit is the effective purchase of growth, dropping prices to fill seats that would otherwise fly empty, and the LCC market is no different once competition intensifies. In order to fill that extra capacity, the average revenue per passenger (fare plus ancillaries) fell by 9% in 2016, from EUR 82 in 2015 to EUR 74.

Perhaps ominously, two of the most profitable carriers, Ryanair and Wizz Air, reported the lowest average revenue per passenger in 2016, at EUR 57 and EUR 68 respectively. Our estimates suggest that they also had the lowest costs per departure (flybe excepted due to smaller aircraft) and the highest number of profitable routes in our airline group, above 80% for Ryanair and just below 80% for Wizz Air. 

Eurowings, Norwegian, Vueling and Wizz Air reported the smallest declines in average revenue per passenger, while Transavia and easyJet reported the largest fall, but we estimate that all nine of the airlines saw their average revenue per passenger decline last year.

Translated into profitability, easyJet reported the largest absolute fall in profitability, while Eurowings and Transavia reported the steepest percentage declines. Norwegian and Wizz Air both reported strong profit growth, while Ryanair’s profits also grew, albeit by less than 10%.

On the cost side of the equation, things held steady, with the average cost per departure falling by 5% to just under EUR 10,000. We estimate that Transavia, Norwegian and Eurowings have the highest costs per departure, though the latter two are pushed up due to their long-haul operations with larger aircraft. It appears that Transavia in particular has work to do to get its costs down to levels typically experienced by the other LCCs.

The geography of the business

Turning now to where the airlines make the most of their money, the chart below shows the ten most profitable countries in 2016 and 2015. Top of the list is Spain, contributing around EUR 1.6 billion Euros in both 2015 and 2016, though with a slight decline last year. The UK is in second place, but with profits dramatically lower in 2016; profits fell 30% in GBP terms, but with the weaker exchange rate this extended to over 40% in Euro terms. From being comfortably the second most profitable country for LCCs in Europe, the UK is now competing for that position with Italy, at around the EUR 650 million profit level. 

Graph showing countries and cost for 2015 and 2016

Not shown on the chart are the fourth and fifth biggest LCC passenger markets in Europe, Germany and France. Profits in France declined around 40% in 2016, leaving the country as the 13th most profitable in Europe, having been in the top 10 in 2015. Germany appears to have had a very poor 2016 for its LCC airlines, plunging to a loss of over EUR 90 million from a 2015 profit of around EUR 150 million. Of all the major markets in Europe, Germany appears to be the most difficult at the moment, with only Ryanair and Wizz Air making any money there in 2016.

Drilling down further into the numbers, some airports are more profitable than others for their airline operators, at least in terms of operating revenues versus operating costs. Of the top ten most profitable airports in Europe for LCC operators, not surprisingly five of them are in Spain, while two are in the UK. On average, the airline operators turned a profit of just under EUR 17 for every passenger at these airports, from an average revenue per passenger of EUR 80.

At the other end of the scale, five of those contributing the largest losses for their airlines are in Germany, again no surprise, with two each in France and the UK. On average, the airline operators are losing over EUR 10 per passenger at these airports, from an average revenue per passenger of EUR 69.

The airlines with the highest number of profitable sectors were Ryanair and Wizz Air, while those with the lowest number include Transavia, Eurowings, Flybe and Vueling.

The environmental impact of the business

The average sector distance (in great circle terms) increased by almost 2%, from 1,160km to 1,190km. Flybe flew the shortest sectors in 2016, at just 500km on average, while Norwegian had the longest at an average of 1,575km. Average aircraft size also increased, from 168 seats to 171 seats, with Eurowings and Wizz Air seeing the largest increases.

In 2016, the carriers in the study burned almost 9.4 million tonnes of fuel, at an average of 4.5 tonnes per sector. These figures in 2015 were 8.3 million tonnes at an average of 4.35 tonnes per sector. The increase here is likely due to the introduction of larger aircraft and the further growth of long-haul destinations.

In terms of environmental impact, these airlines produced a combined 29.6 million tonnes of CO2 in 2016, which equates to around 94kg per passenger. This latter figure is almost unchanged from 2015, as although in absolute terms significantly more fuel was used in 2016, it was burned more efficiently by larger aircraft on longer sectors, with slightly more passengers per departure.

Summary

The European LCC market continues to grow and subsume all before it. But it is not a single, homogenous being; there are possibly four tiers of operator, even in the modest airline group that we have considered. Firstly there is Ryanair. On lowest cost, lowest average revenue, and highest profit, it really is out on its own. Lowest cost clearly is winning.

The next category covers those LCCs who can’t match Ryanair, but can still turn a profit with a combination of higher costs and higher average revenue per passenger; think Wizz Air (probably the closest to Ryanair in cost and average revenue terms), easyJet and Vueling as the cheerleaders in this group. Then we have Norwegian, straddling the short-haul and long-haul, and in the process probably moving the LCC market in a brave new direction. A genuine innovator that is still able to make money.

Finally there are those subsidiaries of the majors who are yet to find their feet, and perhaps their new identities, Transavia and Eurowings. They look to be operating with higher costs and higher average revenue per passenger than their peers, which is not the best position to be in when many airlines are guiding to lower revenues and weaker growth. Time will tell whether or not these carriers will be able to establish a competitive cost base, and avoid the cost contamination of their Air France-KLM and Lufthansa parents.

We are exhibiting at Routes Europe Belfast, please drop by our stand #S3 and come along to the Apex Profitability presentations we will be running on Monday and Tuesday at 10am and 2pm at the stand. 

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By Richard Leigh / Connect on LinkedInImage of Richard Leigh