November 25, 2014    3 minute read

Clear Skies Ahead for Low-Cost Carriers?

   November 25, 2014    3 minute read

Clear Skies Ahead for Low-Cost Carriers?

It’s been an impressive month for the two giants of no-frills European air transit. Ryanair and easyJet, respectively first and second largest budget carriers in Europe, reported healthy figures recently. It seems favourable conditions have allowed budget carrier profits to take off, despite the dark cloud looming over Europe.

 Ryanair, the largest budget airliner in Europe, raised its annual profit forecast by around 17% earlier in the month. EasyJet posted record profits for a fourth consecutive year, as profits soared by 21%. These results have been due to a strong increase in demand for the first half of the year, perhaps partly due to more consumers opting to ‘fly budget’ instead of with the higher fare flagship carriers. Although some may consider this to be a general trend, a slump in European economic growth and industrial action against legacy carriers has increased the rate of substitution.

Both airlines have sought to compete for directly with one another for market share. EasyJet has started to roll out a frequent flyers programme that aims to price-match airfares of competitors, retain customers, and establish demand within the more discerning business traveller market. Ryanair has also changed its tact to push for higher traffic. The low cost carrier has attempted to imitate easyJet’s successful business model and soft product, whilst utilising its greater economies of scale to keep costs lower than their rival carrier.  Although their respective new strategies are in their infancy, it is expected that both will have a positive effect on traffic and load factors – an indicator of how full a plane is.

There may however be turbulence ahead for the airlines as unit costs are anticipated to increase over the next few years due to higher handling and landing fees at airports across Europe, easyJet Chief Executive Carolyn McCall expressed that [it] is quite worrying in terms of our economic case” in response to the potential doubling of landing fees at Gatwick airport if a planned second runway went ahead. Aging aircraft fleets require more care and investment, which will also push expenditure higher.  Airfares will rise further due to the establishment of new bases throughout the continent and subsequent staffing costs. Although it is necessary to increase capacity and growth in the long run, the price of expansion is likely to be passed on to consumers at present.

These increasing costs will be slightly offset by a 4-year low in oil prices. Airlines are taking advantage of recent oil price weakness to extend fuel hedges, thus locking in future fuel cost savings over the next few years. However, this is partially offset by a relatively strong US Dollar, thus reducing the oil purchasing power of European carriers.

If Ryanair can effectively achieve what it has set out to do by outperforming easyJet at their own game, they can put distance between their main rival. However, as smaller low-cost airlines such as Wizz Air and Norwegian are carrying out aggressive growth and expansion strategies, the two market leaders must both use the optimal economic conditions as an opportunity to invest in differentiating themselves from the rest of the budget airline industry by providing a better customer experience at the most affordable rates.  With rising demand, low fuel prices, and failing flagship carriers, the low-cost airlines must now do battle with each other for market share in order to continue growing in an increasingly competitive market.

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