Q4 2018 LCC Profit Performance; not for the faint hearted

Mar 08, 2019

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For those readers who eagerly await the release of our ongoing quarterly review of European LCC profitability, I’m afraid to say the bad news continues with airline profitability continuing its downward trend. For those that are reading our quarterly review for the first time and are of a nervous disposition, I warn you that there is limited good news, maybe none, in the latest set of figures!

But let’s start off with some good news, passenger growth and plenty of it! Our group of 9 LCCs added 9 million more seats in quarter 4 2018 when compared to the same quarter in 2017, impressive growth of 11% which equalled the previous year. It didn’t quite match the 12% increase in seats but a small decrease in load factor is a decent price to pay.

Q4-18 LCC passenger growth vs Q4-17

Q4 1

Ryanair, by far, still provides most passengers and grew by 8% but it’s overall share has fallen from 39% in quarter 4 of 2016 to 37% in 2017 and now 36% in 2018. easyJet added the most passengers with 2.8 million more this quarter representing 15% growth. Wizz matched the same growth of 15% adding just over 1 million passengers. Eurowings grew by 13% as it absorbed part of Air Berlin and Norwegian’s growth of 12% mainly came from additional long-haul expansion. In fact, only Blue Air recorded a decrease in passengers with a 1% reduction. So, in terms of passenger growth a good healthy picture.

Q4-18 passenger growth by airline

Q42

Financial performance

Again, let’s start with the good news, our Apex platform shows that overall this group of airlines recorded an increase in passenger yield in the quarter when compared to 2017 compounding the increase recorded in the previous year.

Change in passenger yield, Q4-18 vs Q4-17

Q4 3

But the good news is starting to run thin at this junction. Although the headline figure looks impressive, lurking beneath the surface are a number of negative factors significantly increasing costs – fuel cost increases across the board, Norwegian long-haul expansion, staff cost increases at Ryanair and the impact of the massively loss-making Air Berlin network being absorbed into both easyJet and Eurowings. Now that the good news is out of the way let’s get down to reality, what does it mean for the bottom line?

Estimated Q4-18 profitability by airline

Q4 4

The Apex profit estimates show that only one airline made a profit in the quarter, Wizz scraping a pre-tax profit of just €0.3 million in the quarter but down significantly from the €15 million recorded in 2017. And only one airline improved their performance, Transavia marginally trimmed their loss. The big movers were Norwegian where profits reduced by over €300 million, Ryanair went from a profit of €125 million profit in 2017 to a loss of negative €6.5 million, easyJet’s loss widened by €114 million and Eurowings by €72 million.

So overall a very poor performance by this group of LCCs, so poor it makes the negative trend observed in previous quarter not as bad as first thought!

Estimated profit by quarter, 2017 to 2018

Q4 5

As you can see from the full year analysis, each individual quarter of 2018 was weaker than the previous year but in hindsight, performance was actually okay in the first three quarters now that the fourth has been included. Quarter 4 is never an exciting period for generating profits with breakeven previously being a standard expectation at best. Therefore, an overall loss of nearly €700 million in the quarter, reversed from a profit of €9m in 2017, stands out and may be a precursor to an even worse start to 2019, as the first quarter of every year is typically the weakest.

Route level profitability

This next chart looks into LCC profitability at the individual route level. Our LCCs between them, flew over 4,800 unique airline/route combinations during the quarter, mainly intra-European routes but also includes long haul routes operated by carriers such as Norwegian and Eurowings. Profitable routes are those assumed to have a profit margin of 10% or more, breakeven levels are assumed between positive 10% and negative 10% and loss-making routes are those below negative 10%.

Profit breakdown by route, Q4-18 vs Q4-17

Q4 6

Not surprisingly, based on the figures we’ve reviewed so far, our analysis shows that a higher proportion of LCC routes were loss making in the fourth quarter of 2018 when compared to 2017. 50% of all routes recorded a loss lower than negative 10% in 2018 compared to 33% in 2017. Quarter 4 now has over 2,400 loss making routes, up 795 from 2017.

At the other end of the scale, we estimate that only around 20% of routes were comfortably profitable, down from 31% in 2017.

6-month future fare forecast

Our Apex platform already has fully calculated fare forecasts for January 2019 and the good news is that the overall yield for these LCCs is above what was recorded in 2018. But again, the good news is in limited supply with the future outlook appearing weak.

6-month LCC fare forecast up to July 2019

Q4 7

Advanced fares indicate that there may be decreases in 5 of the next 6 months, up to July 2019. The yield increases of 2018 seem to have gone backwards but the one hope is that 2019 fuel prices will be lower than what the airlines had to endure in 2018. Therefore, if the fare projection is correct, it does not necessarily imply a further reduction in profitability, the biggest impact will probably be fuel.

Now looking at fuel in more detail, the chart below shows both the average spot price by month for jet fuel (green line) and also the rolling 12-month average (blue line). The story is similar for both, mostly trending up with little respite. After several months of quite steep monthly increases throughout 2017 and 2018, up to the high point of Oct-18, it did dip for the last 2 months of 2018 but has been back on the rise again in both Jan-19 and Feb-19.

It’s very difficult to accurately forecast fuel but so far it looks like the average for quarter 1 of 2019 will be similar, although maybe slightly lower, to quarter 1 of 2018. Therefore, don’t expect any miracles in the first quarter of 2019. Last year fuel prices stayed stubbornly high from Apr18 to Oct-18, each month was above $2 per US gallon. So, let’s hope, without forecasting, that the same period this year will stay comfortably under this and allow airlines to recoup some of the losses they are likely to incur at the start of the year.  

Average Fuel Price 

Q4 8

In conclusion

You were warned, quarter 4 was dreadful for the combined profitability of this group of LCCs and it doesn’t give much confidence for the near future. Based on the previous quarters of the year we should have been expecting a performance slightly worse than the small profit recorded in 2017 so a negative turnaround of nearly €700 million from last year is quite a shock. What is worrying is the fact that quarter 1 of each year is typically by far the weakest with losses normally much deeper than quarter 4. If that trend continues into 2019 then we could see a significant loss across this airline group.

If we apply the typical quarterly drop in profits, our group would comfortably post a combined loss of €1 billion, let's hope that is not the case!

Iain Smith

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Iain Smith
Director

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