Q1 2019 LCC Profit Performance Review

Aug 06, 2019

More

Surely things can only get better!

[This article is a continuation of RDC’s quarterly review of European low-cost airline performance using data from the Apex subscription platform, www.rdcapex.com. The analysis covers all routes operated by Ryanair, easyJet, Norwegian, Wizz Air, Vueling, Eurowings, Jet2, Transavia Netherlands, Transavia France and Blue Air. Profit estimates are adjusted to match the reported EBIT profit levels published by each airline, where available]

I raised the prospect in our last quarterly review of European LCC profitability that the main LCCs may post combined losses of over €1 billion for quarter 1 of 2019 and unfortunately, I was correct. Airlines continue to add capacity but the negative trend on profitability continues with no signs of an immediate improvement.

As can be seen in the chart below, quarter 1 is never a good quarter for these airlines so losses themselves should not be too alarming but it’s the rate of decline in 2019 that raises eyebrows, a decrease of nearly €0.5 billion over last year. The fact that the negative reversal in quarter 4 of 2018 was over €0.5 billion no doubt gave airline planners and investors cold sweats ahead of this quarter but now that it is out of the way panic may start to spread if profits dip significantly again in the important upcoming quarters 2 and 3.

EBIT Profit by Quarter for Europe’s top LCCs – 2016 to 2019

Estimated EBIT Profit by Quarter for Europe’s top LCCs – 2016 to 2019

It’s difficult to take anything positive from the financial analysis of this airline group with most financial metrics negative as can be seen in the consolidated view below – load factor, yield, profit and margin. However at least airports can rejoice in the fact that these carriers have introduced 6.4 million more passengers. The cost for this growth is of course yield and more importantly profit, or lack of it, so significant route churn may be expected as airlines try to buck the trend to improve performance.

Consolidated Financial Performance of Europe’s top LCCs – Quarter 1 2019 vs Quarter 1 2018

Consolidated Financial Performance of Europe’s top LCCs – Quarter 1 2019 vs Quarter 1 2018

The chart below breaks down this data by airline with the order reflecting profitability, Wizz is to the left and had the lowest loss and Eurowings to the right with the largest loss. The good news first, some airlines have improved performance in quarter 1 of 2019 – Wizz Air, Blue Air, Transavia and Norwegian. Norwegian benefited from fuel and currency gains so it could be argued that their improvement may be a one-off and the improvements at the other airlines are miniscule compared to the reversals at the other larger airlines. Ryanair had the largest decline in profits, €221 lower than 2018 when they posted a small profit, and easyJet and Eurowings each had a similar decrease of around €130 million.

The chart below now looks at the level of route profitability by country, the order is passenger market size with the UK being the largest. Of the 15 countries listed on this chart only two recorded a profit in quarter 1 of 2019, these being Norway and Ireland.

EBIT Profit Breakdown of the Largest Country Markets – Quarter 1 2019 vs Quarter 1 2018

EBIT Profit Breakdown of the Largest Country Markets – Quarter 1 2019 vs Quarter 1 2018

The four largest markets of UK, Spain, Italy and Germany all made heavy losses in the quarter and all recorded a significant decrease over 2018. Routes to/from Germany made the largest loss of €235 million and had the largest annual decrease of €106 million. It is also worth noting that losses to/from Spain worsened by over €100 million although much better performance is expected in quarter 2 and 3 of 2019.  

The highest profits were recorded on routes to/from Norway and performance also improved year on year by €32 million taking it from a loss into profit. Other improvements were also recorded in Sweden, Romania and Denmark although all were still loss making in quarter 1 of 2019.

This chart below looks at the most profitable country markets and extends the time period to cover the full 12 months to the end of quarter 1 2019 comparing against the previous 12-month period to the end of quarter 1 2018.

EBIT Profit Breakdown by Country (Best Performing) – Year on Year, 12 Months to End of Quarter 1

EBIT Profit Breakdown by Country (Best Performing) – Year on Year, 12 Months to End of Quarter 1

Spain continues to be the most profitable market, but profits have decreased significantly from €700 million in the 12 months to Mar 2018 to under €500 million in the latest 12 months, a reversal of €212 million. The UK and Italy are in positions 2 and 3 in terms of overall profitability but each decreased by over €100 million. Ireland also had a relatively large decrease of €79 million.

4 country markets have increased profits, these being France, Norway, Romania and Turkey. Of these countries France is the most profitable whilst Norway had the largest increase.

This chart below looks at the countries recording the largest losses in the 12 months to March 2019 and compares it to the 12 months to March 2018.

EBIT Profit Breakdown by Country (Largest losses) – Year on Year, 12 Months to End of Quarter 1

 EBIT Profit Breakdown by Country (Largest losses) – Year on Year, 12 Months to End of Quarter 1

Routes to/from Germany recorded the largest overall loss in the 12 months to March 2019 with a deficit of €267 million, this compares to a small loss of €6 million in the previous year. Profits have been impacted by Air Berlin being absorbed into Eurowings and easyJet and significant expansion by Ryanair.

Germany also had the largest decrease in profits year on year followed by routes to/from the USA with a year on year decrease of €46 million to an overall loss of nearly €150 million. However, it is worth adding that losses in quarter 1 of 2019 were nearly the same as quarter 1 of 2018 so at least recent performance has stabilised.

Sweden, Austria and Finland all had similar annual decreases of around €25 million impacted by significant capacity increases whilst the other country markets are long haul highlighting how difficult these markets are for low-cost carriers.

This next chart investigates LCC profitability at the individual route level for the 12 months up to the end of quarter 1 2019 against the previous period.

Profit breakdown by route – Year on Year, 12 Months to End of Quarter 1

Profit breakdown by route – Year on Year, 12 Months to End of Quarter 1

Profitable routes are those assumed to have a profit margin of 10% or more, breakeven levels are assumed between positive 10% and negative 10% and loss-making routes are those below negative 10%. This airline group between them flew over 5,600 unique airline/route combinations in the most recent 12-month period adding around 300 new routes.

Not surprisingly, based on the figures we’ve reviewed so far, our analysis shows that there is a decrease in the number of profitable routes and an increase in loss making. The number of profitable routes has decreased by 8% whilst loss making routes have increased by 35%. Routes operating at around breakeven have increased by 14%. On closer examination of individual markets, it is clear to see that most of the new routes that have been introduced are loss-making and many previously profitable routes have decreased to breakeven or losses depending on the competitive environment.

The next chart breaks down route performance by airline, displaying the proportion of routes that are operating profitability, those at breakeven and those that are loss making.

Profit breakdown by airline – Year on Year, 12 Months to End of Quarter 1

 Profit breakdown by airline – Year on Year, 12 Months to End of Quarter 1

Of the larger airlines Ryanair has the highest proportion that are profitable with 62% of all routes operating at a profit. Wizz isn’t too far behind with 57% and Transavia France has the highest proportion of all the other smaller airlines with 62%. Eurowings has the highest proportion that are loss making with 45% followed by Norwegian with 38%. easyJet also has quite a high proportion that are loss making, 27% of their routes which compares to only 14% for Ryanair.

The next chart shows the move in percentage points for each profit grouping between the last 12 months to March 2019 compared to the year previous.

Annual Variance in Route Profitability – Year on Year, 12 Months to End of Quarter 1

Annual Variance in Route Profitability – Year on Year, 12 Months to End of Quarter 1

For example, the proportion of profitable routes at Ryanair, coloured in blue, has decreased by 10 percentage points in the last 12 months to March 2019 whilst the proportion of loss-making routes has increased by 4 percentage points.

Of all the airlines analysed easyJet’s network has changed the most with loss making routes increasing by 13 percentage points and profitable routes decreasing by 16. easyJet had the largest percentage point increase in loss making routes with 13 percentage points more routes and Eurowings was just behind at 12%. In contrast several of the smaller airlines decreased the proportion of loss-making routes, Transavia Netherlands improved by 6 percentage points, Transavia France by 5 and Vueling by 4.

easyJet also has the largest decrease in the proportion of profitable routes decreasing by 16 percentage points followed by Ryanair who decreased by 10 percentage points then Eurowings at 9 emphasising the highly competitive markets that these carriers are operating in. Only 4 airlines increased the proportion of profitable routes, Transavia Netherlands increased by 9 points, Transavia France by 4, Vueling by 3 and Norwegian by 1. The most stable networks where there has been minimal variance in performance are Wizz, Norwegian, Vueling and Jet2.

This chart now looks at future fare availability giving an indication of how yields may perform for the next few months of 2019.

Year on Year Fare Forecast up to October 2019

Year on Year Fare Forecast up to October 2019

Apex already has historical fare data up to May 2019, April was okay matching what was recorded in 2018 but it should be noted that it was boosted by the whole of Easter being in the month whereas the impact last year was split between March and April. Unfortunately, May 2019 is noticeably lower than last year and then we are predicting lower fares each month out to October 2019. Therefore, with fuel prices still high, we expect overall grouped profits to decrease in quarters 2 and 3.

Iain Smith

Author

Iain Smith
Director

View team