Full Year 2017 LCC Performance; Probably the Best Ever

Mar 22, 2018

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A few more years like this year and this annual summary is going to get pretty repetitive. A couple of airlines went bust, the legacy carrier LCCs made a better effort to compete, and Ryanair added a load more growth and remained by far the most profitable LCC in Europe. Thank you, goodnight.

I suppose Ryanair does deserve some credit for trying to mess things up in the latter stages of the year by forgetting it needed some pilots, but even that barely registered on the profit-o-meter for the airline, especially if you can trim your operations by not flying the loss-makers. Then there was the timing of Easter and the price of fuel, but neither of those ultimately made much of a difference, and thankfully only one of the two guarantees a raise every year.

Brexit might shake things up a little when whatever that is happens, but as we’ll see later in the piece, the UK market is declining in importance as most LCCs develop their services in mainland Europe. Italy and Germany are the places to be at the moment, with recent elections in the former raising slightly the prospects of Exitaly, though the implications of that eventuality go far beyond the remit of our annual LCC performance summary.

Getting back to the subject in question, let’s look at the numbers.

2017 seat capacity and growth vs 2016

The total number of seats offered by the main LCCs came to just shy of 400 million in 2017, which is an 11% increase over 2016, and in absolute terms saw around 38 million seats added to the market. That actually represents a modest slowdown from 2016, when the airlines added 39 million new seats, though probably not grounds for too much concern. To give these figures some scope, Europe’s largest 13 hub carriers combined (that’s from Lufthansa down to TAP, including Turkish Airlines) managed 395m million intra-European seats between them in 2017, an increase of less than 3% over 2016.

Although not reporting the highest rates of growth, both Ryanair and EasyJet continue to add most new seats into the market, with between them around 16 million during the year. They remain the two largest airlines in Europe for intra-European services, both in terms of capacity offered and number of departures.

Fortunately for our airlines, passenger numbers held up, so all of those extra seats were filled. The airlines actually added 39 million new passengers during 2017, so around one million passengers more than they added in 2016. The combination of fewer new seats but more new passengers meant that load factors were on the up, rising by more than one point to average around 89.5% for the year.

Financial Performance

Turning now to the financial performance of our LCCs, it often follows in the airline world that sustained growth in passenger numbers is more than likely coupled with driving down fares, sometimes to unsustainable levels. As the chart below shows, average revenue per passenger certainly suffered in 2016 (the left-hand arrow), falling by 10% as the airlines cut fares to fill those 39 million extra seats. However, as the arrow on the right shows, 2017 was a different story.

Change in revenue and profit per passenger, 2016 and 2017

Maybe it was the bankruptcies of airberlin and Monarch, and the troubles at Alitalia may also have helped, but the LCCs turned in a respectable performance in revenue per passenger terms in 2017. Those extra 39 million passengers mostly paid their way, with revenue per passenger falling by just 2% compared with 2016. So still falling, but perhaps the market is finding its level at around the EUR 72 per passenger mark, at least until the next crisis.

There’s also an indicator here too that costs were better controlled, no doubt helped by lower fuel prices at the start of the year, as despite the continued fall in revenue per passenger, profit per passenger remained relatively constant, at around EUR 7.70 per passenger.

A constant profit per passenger and more passengers can only mean one thing; our LCCs made more money in 2017 than they did in 2016. Well, most of them did. This chart shows the profits made by our LCC airlines in millions of Euros, with the blue bars showing the results for 2017, and the grey bars showing the corresponding results in 2016.

All the airlines bar Norwegian performed better in 2017, with virtually all of them in the black.

Estimated LCC profit in 2017 and 2016

Despite Ryanair’s difficulties around flight cancellations in Q4, the airline still managed to grow profits by around 8% to over EUR 1.6 billion, a figure that made up fully 62% of European LCC profits in 2017. Eurowings moved from loss to profit during the year, helped a little by the demise of airberlin, while Transavia improved last year’s breakeven position to record a profit in 2017 of around EUR 80 million. Probably the most disappointing result came from Norwegian, as the airline slipped into loss after a number of years of profitability. Given the positive numbers reported by the competition, perhaps one of those faces on the tails of its aircraft should maybe be painted red.

This next chart shows the year broken down into calendar quarters (where Q1 is January to March) so we can see over what periods our LCCs make their money. The timing of Easter had a big impact in the first half of the year, as it fell in the second quarter. This meant that Q1 was unable to benefit from Easter holiday revenues, and without them registered a combined loss for the LCCs of around EUR 600 million, considerably worse than in 2016. Not exactly the best of starts to the year.

Combined quarterly LCC profit/loss,2017 and 2016

Of course, Q1’s loss was Q2’s gain, and things quickly looked up by the half year point, with an EUR 800 million profit in Q2 more than compensating for the disappointing Q1. The summertime brought very healthy profits for most of the LCCs, racking up a combined profit in excess of EUR 2.5 billion in Q3, almost 20% more than they made during the same period in 2016. Q4 marked a return to calmer waters, with the LCCs returning a modest loss of around EUR 25 million. Despite the negative end to the year, Q4’s performance was an improvement over 2016, so brought the year to a close on a reasonably positive note.

From these numbers, we can be pretty confident that 2017 was probably the most profitable year ever for Europe’s LCCs. Based on a cost estimate of around EUR 22.8 billion and a revenue estimate of EUR 25.6 billion, we estimate that they made a combined profit of something like EUR 2.75 billion for the year.

Route and Country Economics

Despite the swathes of black ink in their annual accounts, not everything our LCCs touched turned to gold. Our LCCs between them flew almost 5,200 unique airline/route combinations last year, mainly intra-European routes but of course into North Africa and further afield with a growing long haul network. But not everything they tried made money.

Estimated route performance in 2017

Our figures suggest that over half of all LCC routes were comfortably profitable in 2017. If we include a share of those that we consider to be on the positive side of the breakeven point, it’s likely that as many as 70% of LCC routes were profitable last year.

At the other end of the scale, we estimate that just over 20% of routes were comfortably loss-making, and again if we include a portion of those on the negative side of breakeven, then this could rise to around 30%. LCCs are not very sympathetic to routes that don’t perform, so it’s likely that some of these routes will already have been cut.

The last word goes to geography, and specifically which are the countries that deliver the most profit for our LCCs. There is no change at the top this year, but things are definitely moving elsewhere on the list.

Profitability by country, 2017 and 2016

Spain retained its crown as the most lucrative market in 2017, though profits did slip back to below EUR 700 million last year. Spain is host to three of the largest LCC airports in Europe – Barcelona is the largest LCC airport in Europe, while Palma and Madrid both feature in the top 10. Snapping at the heels of Spain is Italy, now in a clear second place and closing rapidly, just EUR 190 million off the top spot. If last year’s trends continue into 2018, then Italy could be a real contender to be Europe’s most profitable LCC country this year.

Further down the chart things are as-you-were from 2016, with the exception of the UK. As touched on at the start of the article, 2017 wasn’t a great year for LCC operations in the UK. Formerly vying for second place with Italy, LCCs saw profits in the UK dive by almost EUR 200 million in 2017, pushing the UK down to eighth place behind countries with much smaller aviation markets. With Brexit coming along in 2019 to add uncertainty to the market, has the LCC market experienced ‘peak UK’? The UK is still home to three of Europe’s largest LCC airports, but other continental airports are closing the gap.

In Conclusion

After a terrible start to the year, the last three quarters of 2017 rewarded most of those LCCs still standing. The big boys continued to add seats, passengers and profits, while the legacy offshoots of Eurowings and Transavia both became profitable. Norwegian is a slight worry still, expanding ever further afield but struggling to manage the growth nearer to home. But despite their travails, 2017 can go down as a very good year for our LCCs.

 

Richard Leigh

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Richard Leigh
Director

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