Well, perhaps not if you’re airberlin, but most of our airline group benefitted from a good summer. Mind you, they needed to, such was the relatively slow start to the year for most of them. The problems at airberlin and Alitalia will have helped both yields and passenger numbers during the quarter, while Ryanair’s much publicised pilot shortages and cancellations are to impact their operations in Q4, not Q3. Even fuel prices largely behaved themselves during the summer months. So the scene was set for a much needed recovery in the performance of our airline group; let’s see if the numbers bear this out.
Our LCC airline group (see chart below) added around 10 million extra seats in the third quarter, slightly down on the growth experienced during Q2. The German market saw capacity reductions from airberlin, so the overall picture is one of lower capacity growth than we might have expected. Because of this, the per passenger revenue improvement we saw in the second quarter continued, enabling overall revenues to climb quite nicely, aided by robust passenger growth. The net result was a combined Q3 profit for the group in the region of EUR 2.7 billion, representing a healthy growth of more than 20% relative to the third quarter of 2016.
Capacity still on the up
As the chart below shows, most carriers continued their growth rates from the first half of 2017 into the third quarter, with the double-digit growth of the mid-size players bookended by lower growth at the larger and smaller end of the scale. Notable exceptions were Transavia and Vueling, between them adding no additional capacity relative to the same quarter last year. Vueling actually offered fewer seats during the quarter than they did last year, though after a year of consolidation they are forecasting growth once again in 2018. Transavia grew strongly in the second half of 2016, and like Vueling appear to be pausing for breath as last year’s fleet increases bed in.
Q3 seat capacity and growth vs Q3 2016
Both Ryanair and EasyJet are maintaining a consistent capacity growth profile over the year of around 8% to 9%, which in Q3 translated to an additional five million seats and 26,000 departures between them.
It’s a slightly dispiriting statistic that if those levels of growth are maintained (Ryanair’s pilot shortages notwithstanding), they will continue to move further away from the chasing pack of LCCs in absolute terms, as even the double-digit growth experienced by some of the mid-size LCCs failed to even match the seats and frequencies offered by the big two.
Thankfully, the passengers kept on coming as well. During the course of Q3, our airline group carried over 10 million more passengers than they did during the same period last year, with average load factors edging up for most of them.
Q3 passenger numbers and growth vs Q3 2016
Carryings in the third quarter totalled 106 million passengers, which is an all-time record for a quarterly reporting period for Europe’s LCCs. Until the same period next year, of course, as on current performance we might expect another ten million passengers to be added in Q3 2018. As we have seen, this growth didn’t come at the expense of significant discounting and lower passenger revenues, so the quarter delivered a healthy improvement to the finances of most of our airline group.
Q3 financial performance
Having Easter in different quarters in 2016 and 2017 made for difficult quarterly comparisons in the first half of this year. But taking the first half as a whole, results were relatively poor, with only Ryanair and Wizz Air returning a profit. Q3 gives us the first like-for-like quarterly comparison of the year, and as has been mentioned earlier in the piece, the figures for 2017 are looking reasonably strong.
Whereas year-on-year first half yields fell by over 3%, in the third quarter the yields held up much better, at virtually the same level as those achieved in Q3 2016. Our estimates suggest that average revenue per passenger came in at around EUR 87.00, which includes both fare and ancillary revenue. Across the LCC networks, better yields with more passengers meant that more routes turned from Q2 loss into Q3 profit, with in excess of 80% of routes likely to be profitable compared with around 60% in the second quarter. This turnaround is also reflected in the combined profit margin for the group, which at around 29% is back at levels last seen in 2015.
Q1-Q3 route profit margins
Assessing the first nine months of the year as a whole suggests that this improving picture is still being played out against a backdrop of falling revenue per passenger, although the third quarter figure was almost unchanged from last year. Average revenue per passenger has fallen by around 2% against a capacity increase of around 11%, but this does mark a positive turnaround from the disappointing numbers we saw in the first half of the year. With more capacity being taken out in the fourth quarter thanks to the departures of Monarch and airberlin, and cut-backs on the Ryanair network (probably some of their least profitable routes), the second half should actually look reasonably healthy for most of our airline group.
And so to profitability
Adding in the cost side of the equation allows us to complete the picture, and estimate how the improved revenue performance measured in the third quarter has 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)
The first half of 2017 just about broke even for the airline group, but as Ryanair generated most of the profits, most of the airlines actually lost money. Summer is the key period when airlines need to make their money, and they have done reasonably well this year in revenue and profit per passenger terms. Average profit per passenger is on a par with that achieved in 2016 at around EUR 25.00, though well down on the 2015 figure of almost EUR 30.00. Still, carrying an extra 11 million passengers means that the revenue increased by around EUR 1 billion relative to the same period in 2016.
Looking at the combined performance of the airlines in the first nine months looks a little more optimistic than it did at the end of the first half. The airlines added around 30 million more passengers than they carried in the first nine months of 2016, and they recorded a profit of around EUR 2.9 billion, better than they managed at this point last year.
Airline profit, Q3 and Year-to-date (EUR million)
The losses we saw in the first half (Ryanair and Wizz Air aside) have been reversed, with all carriers bar Norwegian and Flybe returning to profit thanks to a strong third quarter. The chart illustrates very clearly the vital importance of a good third quarter for all of the airlines, though Norwegian shows that what looks like a good quarter could in fact have been better. Ryanair continues to lead the pack, making more profit than that made by all of the other airlines combined. Even with their much-publicised cancellations and pilot shortages due to affect them in the fourth quarter, careful cutting of loss-making routes should help offset any increases in crew costs in the short term.
It’s worth mentioning that this might actually be the high point of the year for many of the airlines. The fourth quarter is often a loss-maker, maybe a breakeven quarter at best, so in most cases the final year figures will likely be lower than the profit displayed by the blue bars on the chart.
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 355 million passengers. This is around 40 million more passengers than they carried in 2016.
The upturn in fortunes experienced by most of our airlines in the third quarter has made for a more optimistic forecast for the full year. As mentioned previously, it’s likely that average revenue per passenger will continue to fall, down 2% to around EUR 72 per passenger. However, we expect the profitability of the group as a whole to increase by around EUR 200 million more than they achieved in full year 2016, ending the year at around EUR 2.7 billion. After a dismal first quarter, this represents quite a turnaround.