In the aviation industry we are very familiar with the feeling of waking up, checking our phones and immediately seeing a news bulletin that will have a direct impact on our work. However that said, 2017 has been particularly rife with these stories (airberlin, Alitalia etc.), and none of them have been good news. In this article we dig into two of the most recent news stories – Monarch and Ryanair – and employ RDC’s unique data to provide a new angle on the big headlines.
Monarch – The Fallout’s Winners and Losers
The high-profile collapse of Monarch last week has been well reported. The airline had never successfully adjusted to the new era of low cost air travel in Europe that sprang up in the late 90s and despite several attempts to reposition it from an inclusive tour operator into a low cost carrier, it was always playing catch-up at a time when the competition was too far ahead to catch. As many of the traditional legacy carriers found to their detriment in the early 2000s, it is practically impossible to reverse-engineer an LCC that can match the cost bases of easyJet or Ryanair; and at present there is little passenger appetite for anything other than a low headline price. So, a sad day for aviation, but an inevitable development as the industry moves towards consolidation and profitability.
After its passengers and the employees, the biggest long-term losers may well be its base airports.
In its final few years, Monarch had consolidated operations to just five UK bases. In order of size these were: Gatwick, Manchester, Birmingham, Luton and Leeds Bradford. Of these, Birmingham Airport has the greatest exposure to the loss of Monarch, as the airline was expected to account for 12.2% of capacity in 2017. Leeds and Manchester will also feel the loss with 7.5% and 6.2% of capacity respectively, while at each of the London airports Monarch accounted for less than 5% of capacity.
With these airports generating revenue from the airline through landing and passenger charges – plus the retail and car-parking expenditure from passengers – they look destined to lose financially until Monarch’s routes are taken up by another operator. For the winter at least, this looks unlikely.
The chart below shows the estimated annual loss of aeronautical revenue at each of these airports which we have calculated using the 2017 flight schedule at published aeronautical charges. While it is likely that Monarch would have had deals in place with at least some of these airports, given their long-term presence and lack of growth it seems unlikely that these would have contained significant discounts over the published rates.
Estimated aeronautical revenue (published charges) at Monarch’s base airports, full year 2017
As can be seen, the big losers in total revenue will be Gatwick, Manchester and Birmingham, all with over £17million of lost annual revenue. Given the aforementioned 12.2% share of capacity, Birmingham Airport is likely the biggest loser of all in the Monarch fallout.
Monarch’s airline competitors may not have viewed Monday 2nd October as such a sad day. The winter season is typically very challenging for the industry, with lower demand translating to weaker yields, but the same number of aircraft to try and operate, so any reduction in capacity over the next six months will be seen as a good thing. The chart below shows the probable benefit by base for the airlines most likely to gain from Monarch’s losses, either through backfill or simply reduced competition on existing services. This has been calculated on a route-by-route basis by assigning shares of Monarch’s capacity to the other based airlines according to their capacity to each destination from other UK airports.
Estimated share of spoils for Monarch’s airline competitors
As can be seen, Ryanair and easyJet stand to gain the most from Monarch’s demise. easyJet is likely to be the primary beneficiary at Gatwick, but much of this will depend on how Monarch’s slots are allocated, and it would not be a surprise if Norwegian were to use this as a moment to significantly increase its presence in the London market. That said, sounding a note of caution, the uncertainty over the shape of a post-Brexit UK coupled with extreme taxation on air transport and the current weakness of sterling against the dollar and euro do not necessarily add up to the UK being an attractive investment opportunity right now. We suspect an element of capacity discipline will ensue while the remaining players figure out their strategies.
Our thoughts are with those who worked at Monarch – an airline that has been part of the UK aviation-scape for most of our lives. They were a well-respected and loyal team, perhaps the last of the old school. As we have seen in the past with the demise of BCal, DanAir, Laker, AirUK, GB Airways, British Midland, Air Europe and others, life is very difficult outside the very top tier of UK aviation. In these days of price comparison and consumer switching, quality and service alone are tough marketing tools.
Ryanair Winter Suspensions – An analysis
In a surprise move last month, Ryanair opted to suspend 34 routes through the 2017/18 winter season. The aim is to help Ryanair recover from the pilot rostering issue that has already caused it to cancel thousands of flights.
Map of the 34 routes due to be suspended by Ryanair this winter
Of these 34 routes, four were new routes due to be launched this winter (Edinburgh – Sczcecin, Edinburgh - Hamburg, Hamburg – Oslo Sandefjord and Thessaloniki – Bratislava), while a further two were only launched in June 2017 (Hamburg – Katowice and Hamburg – Venice Treviso). Additionally five established routes were due to enter their first season of winter operation (Thessaloniki – Warsaw Modlin, Bucharest – Palermo, Krakow - Trapani, Hamburg – Thessaloniki and Faro – Newcastle). This leaves just 23 routes that were previously operated through winter 2016/17.
The table below shows the top ten routes in terms of planned capacity between Nov-17 and Mar-18. The largest route to be suspended is London Gatwick to Belfast International, a route launched in March 2016 using remedy slots acquired after the IAG purchase of Aer Lingus – however it is not believed that Ryanair is at risk of losing these slots as a result of the suspension. Ryanair has also suspended two other recently launched UK domestic routes, in London Stansted to Edinburgh and Glasgow. These are interesting suspensions as historically they have been some of the least seasonal routes on Ryanair’s network.
Top 10 suspended routes by planned capacity (November-March)
The chart below shows all Ryanair routes operated in last year’s winter season (November 2016 to March 2017), ordered by profit per passenger according to RDCApex.com.
Of the 23 suspended routes that were operated last year, 19 made a loss last winter (83%) as highlighted in green. Network wide, only 37% of Ryanair routes made a loss last winter, showing a clear preference from Ryanair to suspend loss-making routes.
Ryanair network profitability in Winter 2016/17 with suspended routes highlighted
These suspended routes include what appears to be the worst performer from winter 16/17, Glasgow to Las Palmas at around a €43/passenger loss. Perhaps, given the sector length and block time of 4 hours 40 minutes, this is unsurprising.
In total we estimate that Ryanair lost around €21.5 million on these 23 routes last winter, an average of €4,600 per flight, or €26 per passenger. This compares to a total network profit of €50m between November and March.
Clearly Ryanair has leaned towards suspending loss-making routes. However this is not an unreasonable move by the airline – given that it operates almost the entirety of its network at 90%+ load factor, it is not possible to limit the impact on passengers by suspending flights carrying fewer passengers. Therefore when presented with the option of suspending popular routes with potentially higher fares or routes with weaker demand and lower fares, the choice is a relatively simple one and in any case should ensure there are funds available to assist in paying for compensation where necessary.