Q1 2017 LCC Performance; Eight Million More Passengers, but the Cupboard is still Bare

The first three months of the new year are not normally a time airline managers look forward to. For most, it is the least profitable time of year, and something to be endured before the sunlit uplands of Spring and warmer weather entice more passengers and more revenue onto their aeroplanes. Old Father Time toys with them a little too, adding in an extra day of pain in February every four years with a chuckle; oh how the industry would rather have had last year’s extra day in June when they could have done something with it.

In 2017 it’s the turn of the Church to poke fun at the airline business. Easter offered some respite in 2016, making one of its occasional meanderings into March and helping make last year’s Q1 figures look a little better. This year it fell in late April, taking most of its holidays and flight bookings with it into the second quarter. Already the ‘E-word’ has been fingered by a number of carriers as a contribution to weaker revenues during the first quarter. So how bad has it been?

Well, starting with the good news, the nine airlines we currently follow (see the chart below) carried around eight million more passengers than they did during the same quarter in 2016, even without the help of Easter.

That’s the end of the good news; now for the slightly less good news. Our airline group added around nine million extra seats in the quarter, so had plenty of additional capacity to fill. Yields fell significantly, and although overall revenue ticked up slightly, it was still pretty flat compared with 2016. And all those extra seats came at a cost. The net result was a bigger Q1 loss than in 2016, and as revenues were flat, all those extra seats were effectively given away for free.

All those extra seats

As the chart below shows, all the airlines bar easyJet recorded double-digit growth in capacity over the same quarter in 2016. Relative minnow Blue Air aside, Eurowings and Transavia recorded the biggest percentage increases, presumably in an effort to bulk up their offering and compete with the bigger players.

Growth in seat capacity vs Q1 2016

Growth in seat capacity vs Q1 2016

Source: rdcapex.com/OAG

The largest absolute contributors to Q1 growth were Ryanair and easyJet, between them adding around 4.3 million seats, or around half of the total new capacity on offer. Having originally developed the LCC market in Europe, they are showing no signs of giving ground to their younger rivals.

Perhaps as a result of giving away much of the new capacity during the first quarter, our airline group is moderating capacity growth in the second quarter. The forecast growth in capacity is down at around 8%, or almost eight million new seats in absolute terms, pushing the total seats offered to just over 100 million. This absolute seat growth is on a par with seat growth in the first quarter, perhaps in recognition that the growth experienced in Q1 and before cannot be profitably sustained.

Quarterly growth in seat capacity

Quarterly growth in seat capacity

Source: rdcapex.com/OAG

Of course Easter falls in the second quarter this year, so passenger numbers will be given a helping hand, as hopefully will passenger yields. Even so, as the airlines struggled to fill the new seats in the first quarter, there will likely be a yield impact once again in the second, as they look to add around seven million more passengers than they carried in the same period last year.

Q1 financial performance

As mentioned previously, revenue per passenger fell relative to the same period in 2016. Our estimates suggest it fell by around 10% overall, with the airlines averaging around EUR 60 per passenger, which includes both fare and ancillary revenue. Across the networks route struggled, and we estimate that more than half of the routes served by our airlines lost money in the first quarter.

The cost of adding all these extra seats also weighed heavily on the numbers. With the falling yields unable to cover the costs of the additional capacity, the overall profit margin sank to around -18% for the airline group, down from a figure just below -6% last year (and around -7% in 2015).

Q1 route profit margins

Q1 route profit margins

Source: rdcapex.com/OAG

Is there a link between rising capacity and falling revenue per passenger? Yes, of course. Chopping prices to fill seats is the ethos of the LCC business, and as significant competitors with deep pockets want their share of the action (think Eurowings and Transavia), the natural reaction is to lower prices still further.

The following chart shows how the relationship between capacity and revenue per passenger has played out since the start of 2016 for our airline group. The figures relate to the percentage change over the same period in the preceding year; for example, the Q1-16 points show the percentage change in the two variables over the corresponding Q1 period in 2015.

Relationship between capacity change and revenue per passenger

Relationship between capacity change and revenue per passenger

Source: rdcapex.com/OAG

The figures produce a near mirror-image, with each increase in capacity met with a similar magnitude fall in the average revenue per passenger. If anything, the per passenger revenue line looks to be softening, which is a worrying trend with the prospect of an 8% capacity increase in the pipeline over the Summer months.

On this basis, we can expect the average revenue per passenger for our airline group to continue its decline, probably in the region of 7%-8% below the rates seen in the corresponding 2016 quarters. That would equate to an average revenue per passenger of around EUR 66 in Q2 and EUR 82 per passenger in Q3; in 2015, the equivalent figures were EUR 78 and EUR 98. For those airlines that didn’t make much money in 2016, it doesn’t look as though 2017 is going to be any easier.

And so to profitability

Adding in the cost side of the equation allows us to complete the picture, and estimate how these falling per passenger revenues have impacted, and will impact, overall LCC profitability. The following chart shows our estimates for profit (or loss) per passenger for each quarter since the start of 2015 for our group of nine airlines.

Quarterly average profit per passenger estimates (EUR)

Quarterly average profit per passenger estimates (EUR)

Source: rdcapex.com
As already stated, the first quarter is the worst quarter, and Q1 2017 was considerably down on previous years, with an average loss of around EUR 10 for every passenger carried. The usual role of the second quarter, to undo the damage of the first, looks unlikely to come to pass this year. Although Q2 will likely deliver over 20 million more passengers than did Q1, the profits they bring will not be enough to offset the losses made in the first quarter, as the profit per passenger is just too low.

It’s not until the third quarter that the airlines can make their money this year, but even then, capacity growth running at around 8% will drag profit per passenger down to below EUR 20, a fall of almost 40% since 2015. Although we have not made any projections for Q4, our historic figures suggest that the year will end with another loss-making quarter.

In summary

Looking at the combined performance of the airlines in the first quarter delivers a very sobering statistic. The airlines added around eight million more passengers than they carried in Q1 2016, yet the overall revenue remained roughly the same. That’s eight million passengers with barely any revenue growth. A little over nine million extra seats, almost all of them filled, but no new money.

This makes life particularly difficult for those carriers who maybe saw the collapse in fuel prices as a catalyst to go low-cost. Not only have fuel prices started to recover a little, but yields have sunk by double-digits in the meantime. What was a difficult if respectable target for seat costs in 2016 now looks to be a bit on the high side again, so yet more pain is required to gain a sustainable place at the LCC table in 2017.

Based on a continuation of the trends happening in the market, we can bring our capacity, revenue and load factor assumptions together into a forecast for a possible outturn for the first nine months of 2017. It’s possible that in Q3, our group of nine airlines will carry in excess of 100 million passengers, the first time that figure will have been reached in a three-month period. Over the nine months to September, they will have carried around 25 million more passengers than they did in the first nine months of 2016. But if our revenue per passenger estimates are reasonably accurate, they will carry these extra 25 million passengers with little or no additional revenue over what they earned in the first nine months of 2016.

We are running a webinar to showcase Apex Profitability and the Q1 data on Thursday 18th May at 10:00GMT, please click here if you would like to join the webinar.

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By Richard Leigh / Connect on LinkedIn Image of Richard Leigh