Q3 2018 LCC Performance; Not Quite as Hot as the Weather

Nov 20, 2018

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Though it seems a long time ago now, the European summer of 2018 was pretty hot. As usual, we were treated to pictures of toddlers wandering through water fountains, office workers spending their lunch hours in parks, and beaches packed horribly full with red or white bodies, depending on how many northern Europeans were present. Bodies clothed in red and white were frequently pictured over in Russia, enjoying the once-in-a-lifetime spectacle of England outlasting Germany in a major football tournament. But, alas, all good things must come to an end.

Like Ryanair’s inexorably rising profits. Or low fuel prices. The performance of the LCCs in the first half of 2018 has been disappointing, barely breaking even and lagging the performance of previous years. Individually, one or two carriers performed well, but collectively, things could be better. The LCCs have added lots of stuff so far this year – there’s more of almost everything – but the commentaries coming out on results days haven’t exactly been glowing. Despite all this extra stuff, the business appears to be treading water rather than accelerating away, with the one thing missing from most announcements being more profit.

So what’s going on? Let’s delve into the numbers to find out.

Q3 seat capacity and growth vs 2017

Q3 1

The total number of seats offered by the main LCCs came to around 125 million in the third quarter, which is a 10% increase over 2017, and in absolute terms represents almost 11 million seats added to the market. In growth terms this continues the trend seen in the first half, of a modest slowdown from 2017, though in absolute terms the picture is one of similar performance, as Q3 2017 also saw an extra 11 million seats added into the market.

Ryanair and easyJet added the highest number of new seats into the market, despite the problems at the former, and they remain by far the two largest airlines in Europe for intra-European services, both in terms of capacity offered and number of departures, with around 55% of the LCC market between them. However, Ryanair’s growth rate in Q3 slipped to near the bottom of the table, recording its lowest quarterly growth figure for some time at just 4%; for the same period last year, the airline was growing at 9%. Easyjet is clearly on a roll, recording 14% capacity growth in the quarter, up from 8% this time last year.

The quartet of second tier LCCs all continued to grow strongly, continuing to pull away from Transavia, despite that carrier’s near 10% growth. Wizz Air moved up a place to become the fifth largest LCC in Europe, though the Eurowings numbers shown don’t yet include those for that well-known Belgian low-coster, Brussels Airlines. When those seats are included, the combined entity jumps to become the third largest LCC in Europe. The two smaller LCCs have been becalmed for a while, with Flybe continuing to hand back capacity as it struggles to settle on a profitable network.

Passenger numbers kept pace with the additional capacity in the busiest time of the year. The airlines added around 11 million new passengers during the third quarter, bringing the total for the period to 117 million passengers. However, this is around half a million fewer passengers than they added in the same period of 2017, following the trend established in the first half. Load factors were almost unchanged, moving from just below 93% to just above 93% for the third quarter.

Financial Performance

Turning now to the financial performance of our LCCs, this chart shows the movement in revenue per passenger during the third quarter, which is both fare and ancillary revenues combined. The arrow on the left shows what happened during Q3 2017, when dying carriers airberlin and Monarch weighed on the market, causing per passenger revenues to drop by around 2% from their 2016 level, to just over 85 euros.

Q3 change in revenue and profit per passenger

Q3 2

Things are looking better this year. The arrow on the right shows that per passenger revenues picked-up significantly during Q3, exceeding the 87.2 euro per passenger figure that the airlines recorded in 2016. With per passenger revenue having risen in Q1, dipped in Q2, and risen again in Q3, it’s turning into a bit of a rollercoaster year for the LCCs.

However, our estimate for profit per passenger continues to decline relative to 2017, down by around 13% to just over 21 euros per passenger. This marks the third successive quarter of double-digit decline in profit per passenger. Despite booking almost EUR 1.2 billion more in revenue than they did in the third quarter last year, costs have risen by even more, in part down to higher fuel prices but also due to higher labour costs at Ryanair. So just like we saw in the first half, profitability for the industry as a whole continues to decline compared with last year, despite, or because of, the carriage of an additional 30 million passengers in the first nine months of the year.

What does all this mean for the the big-picture economics? Well, Q2 numbers were respectable, nothing more, with many of the LCCs recording lower profits than they did in Q2 last year; Ryanair and Eurowings saw particularly sharp declines.

This chart shows the profits made by the LCC airlines in millions of Euros, with the blue bars showing the results for Q3 2018, and the grey bars showing the corresponding results for 2017.

Estimated Q3 LCC profit in 2018 and 2017

Q3 3

Good news, in that we believe all of the LCCs made money in the third quarter. Perhaps the standout performer of the group is easyJet, with profits growing in excess of 20% relative to the same period in 2017. Whisper it quietly, but the gap in Q3 profitability between Ryanair and easyJet has closed significantly since last year. Whilst easyJet is not yet at the same level, it has certainly pulled away from the chasing pack, most of whom put in a relatively lacklustre performance during the third quarter.

Wizz Air, Norwegian and Transavia all stood still in Q3, maintaining a similar level of profitability to that they achieved last year, while Vueling went backwards slightly; still profitable during the quarter, but not as good as last year. Eurowings is still struggling, extending its poor performance in the first half to the third quarter as well, while the smaller carriers struggle to move the needle very much at all. We estimate that Flybe made a very small profit, less than they did last year, which underlines how much of a struggle their right-sizing process looks to be.

By combining this set of individual airline results we can see how the LCC sector performed overall in the third quarter, and also in the first nine months of 2018.

In the chart below, the purple bars are the numbers for the first half of 2016, the blue bars are 2017, and the green bars are this year.

Estimated profitability over the first three quarters, 2016-2018

Q3 4

As we saw in the Q2 article, the first half of 2018 turned in a disappointing performance. Initially we thought that for the first time in ages the LCCs failed to break even during the first half, but on re-evaluation of the numbers, we now believe they collectively turned in a modest profit, albeit 50% lower than the one they achieved in the same period last year.

The third quarter is traditionally the period where the LCCs make most of their money. As we can see, Q3 2018 performed reasonably well, exceeding the profits generated in 2016, but coming in below those achieved last year, settling at around EUR 2.5 billion. The first half trend of closely tracking last year’s quarterly profitability, but at a consistently lower level, now also extends into Q3. The fourth quarter of 2017 ended up with a very slight loss, but very close to breakeven. If the slightly worse year-on-year performance is maintained, then we can expect the LCCs to report something similar but slightly worse for Q4 than they did in 2017, so possibly a loss of the order of EUR 50 million or so.

Considering the unseasonably hot summer experienced throughout much of Europe this year, revenues have held up reasonably well. But it’s the higher costs that pegged back the first half year results that continue to weigh on the numbers, dashing hopes that Q3 this year could produce the best quarterly profit ever for Europe’s LCCs. Well, maybe next year.

Route Level Economics

The LCCs between them flew over 4,800 unique airline/route combinations in the second quarter, that’s around 7% more than in the first quarter, mainly intra-European routes but of course into North Africa and further afield with a growing long-haul network.

Estimated route performance in Q3 2018

Q3 5

Whereas we estimated that only 45% of LCC routes were comfortably profitable in the second quarter, the third quarter produced much better numbers, with almost 75% of routes returning a profit margin of 10% or better. If we include a share of those that we consider to be around the positive side of the breakeven point, we estimate that more than 80% of LCC routes were profitable during the quarter.

At the other end of the scale, we estimate that only around 10% of routes were comfortably loss-making, so those with a profit margin of -10% or worse, which is a much better return than the almost 30% of loss makers estimated in the second quarter. Again if we include a share of those on the negative side of breakeven, then we estimate that fewer than 20% of all LCC routes were loss making in the third quarter.

So things are getting better, as expected, but not at quite at the rate required. The final quarter of the year is what could be termed as ‘after the Lord Mayor’s show’, when the fireworks are over, the excitement is done, but there’s still some more time to be filled. The performance over the first nine months of the year suggest it could indeed be a dull quarter, but as well as measuring historic performance, we can also assess what might be in store by looking at our estimate for average monthly fares out to the end of the year. So far in 2017 they seem to be doing better than they did in the past couple of years, hopefully this is a trend that can continue through the fourth quarter.

The chart below shows the estimated average fare (in this case including charges and taxes) across the top 100 European LCC routes (by capacity) by month for the July-December period each year from 2015 onwards. Looking first the third quarter, the data suggests that fares on core LCC routes across Europe held up well during the period. This is borne out by the increase in average revenue per passenger we saw earlier, but the fall in profit per passenger meant that the increase in costs more than offset the positive revenue gains.

Estimated average fare, top 100 European LCC routes by capacity

Q3 6

Our fare estimates for Q4 suggests a narrowing of the gap between 2018 and last year, pointing to a potentially less positive revenue message for the end of the year. Only in December do we expect there to be any significant improvement in average fare over last year. It’s interesting to note that the trend and values we expect to see this year are virtually identical to those seen in 2015; not a particularly exciting comparison, but disappointingly something of an improvement over the intervening years.

With the narrowing of the fare gap with last year, it doesn’t bode so well for Q4’s potential profitability. Higher costs have muted results for the first nine months of this year, and there’s no reason why Q4 should see a sudden improvement. The conclusion made previously that Q4 would probably make a modest loss is thus supported by these fare estimates, and if anything, with less revenue upside in the final quarter, the collective industry loss could potentially be a little wider, in excess of EUR 50 million rather than below it.

In Conclusion

On the whole, the numbers for the first nine months are not bad, but it is disappointing that profitability growth has gone into reverse. Despite carrying almost 30 million more passengers than in the first nine months of 2017 (an increase of 11%), profitability for the group has declined by over EUR 200 million. Our analysis suggests that only easyJet, Norwegian and Transavia have managed to improve their profitability relative to the first nine months of 2017, though Norwegian still made a loss. Wizz Air is broadly flat, and for all the other LCCs, the position is worse. EasyJet is having a particularly good year, Ryanair is treading water as it sorts out its labour issues, and Eurowings, well, the less said about them, the better.

All in all, Q3 was probably a miss from a financial standpoint. Not a surprising miss, and revenue per passenger did tick encouragingly upwards, but the quarter and the year so far have underperformed last year.

Richard Leigh

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Richard Leigh
Director

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