Well that was a relief! After a dismal Q1, things have taken a turn for the better in Q2, with Easter adding some sparkle to the numbers reported by our group of LCCs. Airlines do tend to go on a bit about Easter having a significant impact on their numbers, yet the comparison between the first two quarters of this year and last do seem to bear this out. After all, a two or three week holiday period spaced nicely between Christmas and the Summer offers up almost a month of nice prices in an otherwise unattractive part of the year. So not surprisingly, the lack of Easter in the first quarter dragged the quarter down to be worse than it otherwise would have been. And so consequently, the appearance of Easter in the second quarter has made this quarter look artificially better than it deserved. And so to some numbers.
Our LCC airline group (see chart below) added around 11 million extra seats in the second quarter, so once again had plenty of additional capacity to fill. Despite this, per passenger revenue fell only slightly, meaning overall revenues climbed quite nicely thanks to robust passenger growth. The net result was a combined Q2 profit for the group in the region of EUR 860 million, though as we shall see later, such healthy profits weren’t strong enough to offset the poor figures most of the airlines served up in the first quarter of the year.
As the chart below shows, capacity just kept on coming, with the double-digit growth of the mid-size players bookended by lower growth at the larger and smaller end of the scale. However, given the scale of operations, in absolute terms both Ryanair and EasyJet added more seats than the other carriers despite the lower rate of growth.
To reinforce this difference in scale, taking the first half of the year as a whole, Ryanair’s capacity exceeded the capacity of Eurowings, Norwegian, Vueling and Wizz Air combined, and between them, the ‘big two’ contributed almost 60% of the total LCC capacity.
Growth in seat capacity vs Q2 2016
Ryanair maintained a consistent growth profile in Q2, adding slightly more seats than in Q1 but not by much. EasyJet adding around half a million more seats than it did in Q1, Wizz Air an extra 700,000, while the biggest mover in Q2 was Eurowings, with almost one million more seats added compared with its Q1 capacity. At the other end of the scale, Transavia, Vueling and Flybe all added fewer new seats than they did in Q1.
The net result of all this activity was that capacity growth continued to grow strongly, up by 11% relative to the second quarter of 2016. This level of quarterly growth is remarkably consistent, with each quarter since Q1 in 2016 recording a similar level of percentage growth. It was starting to look unsustainable after a poor first quarter, but Easter has helped the second quarter bounce back to respectability, and our airline group looks likely to maintain a growth rate of around 11% for the remainder of the year. Although during the second quarter the average revenue per passenger held up reasonably well, this relentless increase in capacity will undoubtedly maintain pressure on yields.
Quarterly growth in seat capacity
The benefits of Easter can be seen in the passenger numbers achieved in the second quarter. Our airline group carried over 12 million more passengers than they did during the same period last year, compared with corresponding increase of eight million more passengers in the first quarter. So despite continued double-digit capacity growth, airlines are proving capable at filling most of the new seats, though evidently average passenger revenues took a hit in the first quarter. Has the second quarter done any better?
Q2 financial performance
Well, Easter’s move into Q2 has indeed taken a revenue premium with it. We saw how Q1 was fairly miserable for most of our airline group, as the sugar-rush of the Easter holidays was imbibed in Q2 instead. Consequently, we expected that yields in the second quarter would be turbo-charged with the help of Easter, and to some extent that has proved to be the case. Whereas year-on-year first quarter yields fell by over 10%, in the second quarter the yields held up much better, falling by less than 1%; but still a drop nonetheless.
Our estimates suggest that average revenue per passenger came in just shy of EUR 72 per passenger, which includes both fare and ancillary revenue. Across the LCC networks, routes turned from Q1 loss into Q2 profit, with around 60% of routes likely to be profitable compared with just 30% in the first quarter. This turnaround is also reflected in the combined profit margin for the group, which at over 12% outperforms the same period in both 2015 and 2016.
Q1 route profit margins
However, this improving picture is still being played out against a backdrop of falling revenue per passenger, even if the second quarter was only marginally negative. Assessing the first half year as a whole suggests that average revenue per passenger has fallen by around 5%, against a capacity increase of around 11%. With capacity growth expected to continue at around 11% for the rest of the year, it’s therefore likely that the pressure on yields highlighted above will see this negative 5% impact in the first half carried through into the second.
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)
As already stated, the first quarter is the worst quarter, and 2017 was particularly poor relative to previous years, with an average loss of just under EUR 9.00 for every passenger carried. However, the usual role of the second quarter, to undo the damage of the first, has just about come to the rescue once again. With a pleasing degree of symmetry, airlines made a profit of around EUR 9.00 per passenger during the second quarter. Thanks to the higher passenger numbers in Q2, this translates into a small profit for the group in the first half of the year, though the figure is lower than that achieved in the same period in 2015 and 2016.
Looking at the combined performance of the airlines in the first half looks a little more optimistic than it did at the end of the first quarter. The airlines added around 20 million more passengers than they carried in the first half of 2016, and they recorded a profit of around EUR 290 million. However, as is often the case with airline economics, what looks to be positive at the macro level is not always so in the detail.
First half profitability estimates by carrier (EUR million)
Only two of the carriers were actually profitable in the first six months of 2017, and two experienced a significant reversal in fortune when compared with the same period last year. Ryanair was far and away the most profitable carrier in the group, with Wizz Air reinforcing the oft-quoted line that low cost always wins by being the only other carrier in the black. Everyone else made a loss in the first half. The figures were particularly bad for EasyJet and Norwegian, with both suffering significant reverses relative to the first half of 2016; Norwegian took the honours as the worst performer, moving from a EUR 77 million profit to a EUR 140 million loss.
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 full year 2017.
It’s likely that in the second half of 2017, our group of nine LCCs will carry in excess of 190 million passengers, which will deliver a year-end total of around 360 million passengers. This is around 42 million more passengers than they carried in 2016. Whilst we expect these extra passengers to deliver additional revenue, that revenue will likely be exceeded by the extra costs of carrying them, making overall profitability lower than it was in 2016. As mentioned previously, it’s likely that average revenue per passenger will continue to fall, down 5% to around EUR 70 per passenger.
If our cost and revenue per passenger estimates are reasonably accurate, then our airlines will carry the extra 42 million passengers at a loss of around EUR 8.00 per passenger.