- Revenue per passenger above 2019 levels
- Share prices have rallied across the sector
Europe’s airlines are set for a much more profitable summer as pent-up demand for travel translates into higher ticket prices and airport capacity restrictions continue to ease.
The stronger outlook for fares, coupled with lower fuel costs, led BofA Securities analyst Muneeba Kayani to increase operating profit targets for the continent’s major airlines by 14 per cent. Airline bosses should report much stronger bookings for summer in a series of upcoming earnings calls and are “unlikely” to pass on savings they stand to make on jet fuel, which has fallen in price by around 17 per cent since the start of the year, Kayani said.
Low-cost carrier easyJet (EZJ) led the way this week, saying pre-tax profit in the year to September would be ahead of current market expectations of £260mn, which itself is an uplift from the £126mn it was expected to generate in January.
The company, which last summer incurred £133mn of disruption costs as it compensated passengers for delayed or cancelled flights at overstretched hubs, said it will be back to pre-pandemic capacity levels this summer, having recently completed its “largest ever crew onboarding campaign”. It flew around 1,600 flights a day during the Easter holidays, with capacity in the UK already back to pre-pandemic levels and yields ahead of where they were in 2019.
The recovery for low-cost carriers (LCCs) has been quicker than for former flag carriers such as BA-owner International Consolidated Airlines (IAG), Lufthansa (DE:LHA) and Air France-KLM (FR:AF), which have had to wait much longer for restrictions on long-haul flights to ease, particularly to China.
Flexible flyers
LCCs are pulling ahead of legacy competitors in Europe because “they operate a less complex business model, have greater flexibility in where they place their aircraft and price to create demand”, noted John Grant, a senior analyst at flight data specialist OAG.
Still, “pricing levels for everyone are much higher”, and legacy airlines have been more concerned with operating at a profit than bringing capacity back to pre-pandemic levels, he said.
Higher ticket prices meant a double-digit increase in revenue per passenger last year on 2019 levels, an analysis of UK and EU figures by CAPA – Centre for Aviation showed.
Moreover, the typical discount between low-cost carriers and legacy airlines has narrowed, the consultancy said in a report last month. UBS’s European airline fare tracker estimates Ryanair prices were up 49 per cent in the first quarter and are 57 per cent higher for the second, compared with increases of 24 per cent and 30 per cent, respectively, for IAG.
Expectations of higher earnings have translated into strong share price gains. Among the LCCs, easyJet shares are up 57 per cent since the start of the year, Wizz Air (WIZZ) shares are up 47 per cent and Ryanair (IE:RYA) shares are trading 30 per cent higher.
Of the legacy carriers, shares in IAG are up 16 per cent, while those in both Lufthansa and Air France-KLM are up by a quarter.
Despite these gains, only the latter two are trading above historic earnings multiples, Kayani said.
The three legacy carriers are expected to report first-quarter earnings in early May and UBS analyst Jarrod Castle said he expects all of them to narrow losses given strong demand and tighter capacity.
Among the LCCs, Ryanair has a strategic position that is “much stronger” than its closest peer Wizz, which is planning to grow its current fleet of around 170 aircraft to 475-500 by 2030, according to HSBC analysts Achal Kumar and Joseph Thomas. This translates into 20 per cent compound annual growth in seat capacity.
“While this could lower its unit cost, the key question is whether the company can find enough markets to deploy so much capacity profitably. Also, we think that such huge capacity growth could be highly yield-dilutive,” the pair said.
This is because it is likely to involve finding and opening new bases at additional cost. In recent years, Wizz has opened a new base in Abu Dhabi and plans to enter the Saudi Arabian market to expand beyond Europe where it faces tough competition from Ryanair in countries such as Poland, Italy and Spain.
And even though the market is improving, its home market won’t offer anything like the type of growth Wizz will need to fill so many new planes.
Flight numbers are forecast to hit 93 per cent of the 2019 level this year and 98 per cent next year, with a full recovery only expected by 2025. For the rest of the decade, average annual growth is expected to be around 1.5 per cent, according to pan-European body Eurocontrol.
