UK Edition
Hit by headwinds, it's an up and down year for low-cost airlines
Over the last month, Michael O’Leary, Ryanair’s charismatic boss, has watched as around €115m (£103m) was wiped off the value of his stake in the low-cost airline. It is Europe’s low-cost carrier that has suffered the most in what has been a turbulent 2018.
The sector has been blighted by rolling French air traffic controllers’ strikes. Coupled with a more general chronic shortage of controllers across the continent, thousands of planes have been grounded; airlines have suffered heavy financial losses.
Ryanair is facing an additional and arguably more existential threat from its pilots. Just over a week ago they launched concerted industrial action across five countries, grounding one in six flights. It was the airline’s worst ever single day of strikes.
This year was supposed to be the year of consolidation not cancellations.
The failures of Monarch, Air Berlin and Niki in 2017 were supposed to be just the start. Whether through further insolvencies or more classic airline M&A, the number of players was expected to contract.
The European market, half of which is in the hands of the big five – Lufthansa, Ryanair, IAG, Air France KLM and easyJet – would concentrate further. It would become more like the North America market, where 80pc to 85pc of the market is controlled by the largest four airlines.
The cancellations and disruptions this year have affected Ryanair and easyJet, comfortably Europe’s largest two low-cost airlines, in contrasting ways. While the Irish carrier has lost around a fifth of its stock market value since last November, easyJet’s shares have risen by a fifth.
“The insolvencies of Air Berlin and Monarch do seem to be disproportionately benefiting easyJet,” explains Numis travel and leisure analyst Kathryn Leonard.
The story goes that easyJet was interested in buying Monarch before it failed last October. It was hamstrung, however, by the fact that outgoing chief executive Carolyn McCall couldn’t sell the deal to shareholders so close to her departure to ITV. The carrier was pipped by IAG to Monarch’s Gatwick slots and by Wizz Air for those at Luton.
However, says Leonard, only 20pc to 30pc of Monarch’s capacity has been “backfilled to the market”. Whether by luck or design, easyJet ended up in a stronger position without actually paying for the slots.
Meanwhile, Ryanair has been battling its pilots, who are opposed to the carrier’s salary structure because it is too heavily weighted towards variable pay. Almost like a gig worker, the more they work, the more they get, pilots claim. Ryanair has published pilot payslips, evidence that they have a better deal than others in the industry, it says.
“Ryanair is facing major industrial relations challenges as it evolves into a business with normalised labour structures,” HSBC analyst Andrew Lobbenberg wrote in a recent note. Ryanair investors may need to prepare for reduced profits.
So will we see Ryanair – so often an airline that divides opinion – toppled from its perch as Europe’s leading low-cost carrier?
“From an investors’ point of view it is a relative game,” explains Cantor Fitzgerald analyst Robin Byde, a 20-year transport veteran. “Although Ryanair’s margins may be lowered … they are very likely to still be best in class. It is about working out what the new normal is going to be on margins. It is certainly not good for the airline, it is unsettling investors and I would expect more of this to come. But ultimately I would still expect Ryanair’s margins to be best in class.”
But the divergence of Ryanair and easyJet’s share prices is surely proof that they are flying in different directions? “No,” says Liberum analyst Gerald Khoo. “[That] suggestion would only make sense if they all had the same starting point. EasyJet, having had a period of profit weakness is now rebounding. Ryanair, having been consistently strong has hit a bit of a wobble with regards to pilot costs. But it still remains vastly more profitable than easyJet ever has been.”
Norwegian was scripted to be the star of 2018’s consolidation story. Led by its swashbuckling chief executive Bjorn Kjos, questions have been asked about an increasingly complex capital structure and burgeoning debt pile. It is also considerably more exposed to movements in one of airlines’ biggest costs: fuel prices. Recent analysis by HSBC indicated just 25pc of its fuel costs are hedged. This compares with a European average of 71pc. Ryanair and easyJet have locked in 90pc and 87pc of their fuel costs respectively. When IAG made two approaches for Norwegian in April a bidding war was widely expected. Lufthansa duly declared an interest while Kjos said it had received “several inquiries” of interest. However, talks have gone on a summer siesta subsequently.
Leonard believes it isn’t just the big legacy carriers that could be interested in Norwegian: “Clearly there are a lot of people in the market that think that operation is going bust. If it does, it presents an interesting opportunity for some of the low-cost carriers.” Christophe Debus, the chief executive of Thomas Cook Airlines, won’t rule out having a look. Although Kjos has run the Scandinavian operations “very successfully”, Debus raises his eyebrows at the large numbers of aircraft Norwegian has on order. “[It] immediately adds a lot of complexity,” he says. “Air Berlin did it 10 years earlier than Norwegian, There are some similarities. And you know how Air Berlin went.
“It is too early to say what is going to happen to Norwegian.” But selling Norwegian on a piecemeal basis would be technically challenging, Debus believes. Thomas Cook Airlines has been the subject of reports that it is to be spun off. Debus rebuffs such suggestions, but admits to closely monitoring Norwegian.
Would he be interested in buying parts of the airline? “That is extremely speculative … [but] we are a profitable business and we permanently look at opportunities to take routes,” he says. “If there is disruption around Norwegian and there might be an opportunity, then we will look at it at the time.” IAG’s pursuit of Norwegian, meanwhile, coincided with its launching of a new low-cost carrier.
The blandly named Level is already operating out of Vienna airport. Transatlantic flights – squaring it up to Norwegian – have already started from Paris with services from Barcelona set to take off in September.
“Have they been late or early?” says Debus of IAG’s foray into the low-cost space. “They [only] started two years ago, which maybe says everything.” Khoo is not so sure, however. “They are very much not late to the party,” he says. “[People have] forgotten about Vueling. The Vueling brand doesn’t travel outside of Spain and Italy. No one knows how to pronounce it for a start.”
Debus, meanwhile, remains unconvinced about the prospect of the low-cost long-haul experience.
“No one wants to be on a low-cost jet on a long-haul flight for 10 to 12 hours,” he says.
Level’s launch at Vienna – Khoo says it is a “branding thing” for IAG to not use the Vueling brand – is just one element to a curious battle that has erupted between low-cost airlines in the Austrian capital.
Wizz Air has emerged victorious from the Viennese whirlwind. The Hungarian-headquartered and London-listed carrier increased passenger numbers by 24.1pc to 28.1m in 2017, according to industry body CAPA. This made it the fastest growing airline among the 20 largest in Europe.
Its success in Vienna came after it was the first to take advantage of the vacuum left after the demise of Air Berlin and Niki. Wizz announced a deal in January. EasyJet then took on Air Berlin’s Vienna slots and Niki has been succeeded by Laudamotion.
But Wizz is understood to be operating on far more favourable financial terms.
EasyJet expects to make a big loss in the first year on the Air Berlin slots. Laudamotion, the phoenix created by motorsport ace Niki Lauda from his eponymous airline, expects a €150m loss in its first year and is hoping to only break even within three, according to new owner Ryanair.
Wizz, sources said, anticipates to break even in its first year. If that comes to pass, it would be “pretty incredible”, according to Leonard.
So what is in store over the rest of the year? Alitalia collapsed into administration in May 2017; but the idiosyncrasies of Italian bankruptcy law mean this “will not have any impact on its current or future flight schedule”, the company says. Even so, airlines remain alert, ready to pounce if the slots are released on the market.
On a smaller scale, Air Moldova has been put up for sale by the government, and concerns have been raised about Romanian flag bearer Blue Air after it dropped out of Liverpool John Lennon airport less than two months after starting.
Ryanair’s spat with pilots is likely to run into the autumn. But it could peter out as winter approaches. With fewer flights operating over the winter, the balance of power shifts and the impact of strikes on operations diminishes.
In Ireland at least, talks showed signs of progress last week with negotiations running into the early hours.
Ryanair had ceded to nine of the pilots’ 12 demands before the latest round of talks had started.
Talks with German pilots will be tougher. Strict labour laws present a tough challenge to Ryanair’s stripped back cost base.
As for Willie Walsh’s metaphoric game of footsie with Kjos over Norwegian? The IAG boss has insisted the deal is “not going anywhere”.
However, Debus says: “Looking at the position of Norwegian at Gatwick, or in other parts of Europe, there is a lot of logical argument why it makes sense.
“But Willie Walsh has also said that they don’t want to do that at any price. Of course, he is a smart businessman."