The bumper sales enjoyed by low-cost carriers flying holidaymakers to Europe’s hotspots may not be as easy to replicate next year, as cost-of-living pressures and capacity increases are set to weigh on demand.
Although easyJet (EZJ) recorded what chief executive Johan Lundgren described as “the best summer" in the company’s history last Thursday, its shares fell by 10 per cent over the next two days last week as analysts cast doubt on its ability to maintain robust pricing levels.
“I think 2024 will be a harder year than 2023, there’s no doubt about that,” said John Grant, a senior analyst at aviation analytics company OAG.
Countries began reopening airspace from pandemic lockdowns at different times and in the US, where travel recommenced earlier, the "revenge spending" patterns of heightened travel are winding down, Grant said.
Travellers there have burned through excess savings and pent-up demand “is being exhausted”, he added.
“We’re about six months behind that,” Grant said.
Low-cost carriers like easyJet, Jet2 (JET2), Ryanair (IE:RYA) and Wizz Air (WIZZ) have enjoyed much stronger pricing power and have been quicker out of the blocks than some of the debt-hobbled legacy airlines in capitalising on this.
Although total European air traffic was still only at 93.5 per cent of pre-pandemic levels last month, according to Eurocontrol, low-cost carriers have boosted capacity. Wizz Air's capacity at the end of June was at 164 per cent of pre-pandemic levels, while Ryanair's was at 123 per cent.
In a full-year trading update last week, easyJet said its capacity at the end of September was a fifth higher than at the same period in 2019. And both higher passenger numbers and a 9 per cent increase in ticket yields helped the airline to post a 42 per cent growth in revenue for the year to £8.2bn, while operating profit moved from breakeven in the previous year to £470mn.
EasyJet plans to increase capacity over the next three months by 15 per cent, Jet2 has increased its winter capacity by more than a fifth and Ryanair’s capacity is set to increase by around 11 per cent, despite planemaker Boeing (US:BA) delaying some deliveries.
Yet as low-cost airlines continue their growth push - particularly into high-demand routes on the Mediterranean - there are signs that demand is cooling.
“Our experts believe competition is going to intensify as other airlines look to expand their network to popular leisure destinations,” said Olly Anibaba, an analyst at Third Bridge.
Fuel costs are another concern. EasyJet reported a 40 per cent increase in fuel costs per seat for the year to September to £21.95, or around 29 per cent of its total cost per seat. Although the company expects to be able to hold down ex-fuel costs and has hedged 73 per cent of its fuel costs for its new financial year, this is at a higher rate and when currency headwinds are added in its fuel cost per seat is expected to increase by about 15 per cent, chief financial officer Kenton Jarvis told analysts last week.
Ruairi Cullinane, an analyst at RBC Capital Markets, said that some airlines expect that they will be able to continue passing on cost increases through higher fares given the inflationary environment, but the less favourable supply-demand balance – particularly in the UK, where consumers are facing greater cost-of-living pressures – means this might not be possible.
“Suppressed airline valuation multiples suggest the market is pricing in steeper fare declines,” he said. Indeed, after a 50 per cent gain in value during the first half of this year, easyJet’s shares have slumped by 20 per cent over the past three months and are currently priced at 7-times FactSet consensus earnings. Ryanair shares are priced at 8-times forecast earnings, but Jet2 shares are priced at just 6-times and Wizz shares at a lowly 5.6-times.
Grant said that when compared with the US, where four major players dominate, the European airline industry is still highly fragmented.
This is slowly changing, following Lufthansa’s (DE:LHA) acquisition of Italy’s state airline ITA Airways in May and Air France-KLM’s (FR:AF) purchase this month of a 20 per cent stake in Scandinavian Airlines (as part of a recapitalisation led by US private equity firm Castlelake).
More consolidation is needed, but there are still “so many sacred cows” when it comes to former flag carriers, he said.
“It’s not a necessity that you have your own national airline – it’s an ego trip.”
