Podcast: Budget Airlines Battle Against Headwinds
Low-cost carriers are huge in Europe and the UK. How are they faring as inflation, sky-high oil prices, airport disruptions and the war in Ukraine affect their costs and operations?
Hello everyone, and thank you for joining us for Window Seat, a Aviation Week Air Transport podcast. I'm Air Transport World and Group Air Transport Editor in Chief, Karen Walker, and welcome onboard. So this week I'm joined by my colleagues, Alan Dron, ATW Europe and Middle East Editor, David Casey, Editor in Chief at Roots magazine, and Helen Massy-Beresford who is the Aviation Week European Air Transport Editor. It's great to be with everyone. And thank you for joining Window Seat.
Our topic this week is the state of the low cost carrier market in Europe. We recently talked about changes in the US LCC market as JetBlue and Spirit work to merge. Assuming that gets through the regulatory hurdles, it would still mean that that would be the fifth largest airline in the US with a domestic market share way below that of the big four majors.
Over in the UK and Europe, meanwhile, LCCs are among some of the largest airlines by passenger numbers. You've got big established names, like EasyJet, Ryanair, and Vueling, as well as a host of relative newcomers like Wizz Air and Norwegian Air Shuttle that crisscross the region and operate to just about every airport. As demand for travel returns strongly this spring and summer with a focus on vacations and family trips, these LCCs inevitably led the charge. But they've also been hit by operational ramp-up problems, airport chaos, cancellations, and, of course, fast rising oil costs.
So some of the big questions that are being asked is, how will these European LCCs maintain their very low unit costs, which are essential to their business model? And how will they weather the economic recessions that are being forecast for Europe and the UK? So as you heard, our panelists are all today editors based in Europe and the UK, so I'm going to get some insights from them, starting with Helen.
Helen, you're based in France, which itself is home to several LCCs and you've been tracking the second quarter earnings of many of the region's carriers. What are some of the key trends you are seeing in that market?
Hi Karen. Hi everyone. Well, really three big things. This earning season, one of the huge topics was, of course, the airport chaos that we've seen this summer. So there was a lot of dissecting of how the airlines managed to cope with that, whether it was through canceling flights themselves, whether that was complying with airport caps. And so that was a chance for a postmortem on that situation, even though I'm not totally sure it's completely resolved yet. The other big topic was high fuel costs, rising fuel costs, and very much linked to that, how that demand is going to pan out over the next months. The problem this summer was too much demand. Are we going to be having the opposite problem in the next few months? At what point do these rising costs mean that airlines have to put up their ticket prices to the point where people aren't interested in traveling so much anymore. So I think that was the focus really with all of the carriers that reported in the last few weeks.
Excellent. Yes. So as you say, some key things there, key trends that you're seeing across these carriers. We're going to go back into some a bit more detail on those. I'm particularly interested in what you said about fares and, of course, LCCs, again, the key is ultra fares. Alan. Alan, you are based in London and yesterday you went to a press conference held by Michael O'Leary Group CEO at Ryanair, a huge and very influential LCC in the region. Now I think he recently made some comments about fares and where they're going. What were some of the key things that you heard from him yesterday?
Well, yesterday was the usual fairly bravura of Michael O'Leary performance, for those North American listeners who have never experienced the pleasure of a Michael O'Leary press conference, they are quite frankly a wonder to behold. Forget about corporate media training. Mr. O'Leary holds pretty scathing opinions about, oh, just about everything, governments, regulators, airports, competitors. And if we repeated some of his comments here, you'd probably be getting a call from the Federal Communications Commission, Karen. But yesterday, his message was essentially that, as with the previous four or five recessions that Ryanair has experienced in its existence, it will again emerge stronger than its competitors. While not downplaying the gravity of the looming recession and admitting that some people near the bottom of Ryanair's customer base wouldn't be able to afford to travel, he argued that that would be more than offset by other passengers trading down from more expensive carriers.
Thank you for that color, Alan. As you say, it's always a rather unique experience being at a Michael O'Leary press conference. But that's an interesting aspect of how he's seeing things pan out if there's a recession, is that that's an opportunity for the low cost carriers to actually draw in new passengers from the major carriers, because the budgets will be tighter for everyone.
David, what do you think about that as you look across the European low cost carriers? Is a recession actually an opportunity for that particular sector?
Hi Karen. Thanks. I think, well, it could be, actually. We're going to start seeing LCCs increase the price of airfares because of the high cost of fuel and that's happening already. I enjoy visiting places and finding bargain flights to get there, and it's becoming more difficult to find those really cheap fares. As Alan said, the year of the 10 euro ticket is over and fares are probably going to rise to about 40 to 50 euros average fares over the next five years, Michael O'Leary said. And while that's not expensive compared to other parts of the world, it's a lot more than consumers in Europe have been willing to pay.
Will it be an opportunity? I think it could be. I think people are going to have far less discretionary spend and a recession will dampen overall traffic, but also, people are going to be looking for bargains. They are price sensitive. And if you've got a short haul flight with a full service carrier, that might be two, three hundred dollars. Even if you're paying $50 with an LCC, it might be more than you're willing to pay before, but obviously, you're going to probably go with that lower cost option. So I think there is an opportunity for LCCs to expand. And we've seen that in the past on recessions, if you look at the financial crash in 2008, EasyJet and Ryanair were the big winners then. They both really increased traffic during that time when some of the full service carriers really struggled. And I think that could potentially happen again.
And David, Helen just mentioned there in the overview, some of the key trends about, of course, on the operational side and some of the chaos we've seen at some of the major airports. David, what's your view? A lot of that has happened in the UK. It's not exclusive to the UK, but we've had Manchester, Heathrow, Gatwick, all affected, and others. What's your view? Is it being resolved gradually? And does it have more impact on the low cost carriers than the majors?
As Helen said, obviously we have seen a lot of disruption. We've seen images on the news of last minute cancellation, longe airport queues, problems with baggage handling. And we have seen LCCs as well, cut flights from the summer schedules to try and ease that disruption. EasyJet, in particular, has had a fairly challenging summer that was caught up in a barrage of delays in May and June. And that led to its chief operations officer, Peter Bellew, departing the business. And it has cut flights in July and August since then to improve that operational resilience. And in recent weeks, we have actually seen cancellations fall back to more normal levels. And I think that given that schools in many parts of Europe have either gone back or are about to go back, we should hopefully start seeing an improvement in operational issues at airports, but it's probably unlikely that they're gone for good.
If you look at Spain, for example, we're probably going to see some more disruption there over the coming months because there's going to be strike action that will affect the likes of EasyJet, Ryanair, Iberia Express. And although some of those airlines are playing it down for now, it could result in more cancellations. In terms of airport caps, though, I think LCCs have not been affected as much as full service carries because they just don't have the presence that the Heathrow or the Amsterdam that BA and obviously KLM do. So while we're seeing those full service carriers still really reducing their schedules over the next few weeks, I think LCCs have been insulated a little bit from that.
So Helen, in terms of the other things that these airlines are facing that affect their unit costs, and as I said earlier, that's critical to this market, the oil price hikes, I think Wizz Air is now hedging for the first time and the general inflation and recession fears. Again, what are you seeing and hearing from this sector?
I think the fuel price is really the hot topic at the moment. Jet fuel is up 95% as of a year ago. I checked on the IATA website today, which is quite a scary number for those that aren't very well hedged. And it does vary a lot in the low cost sector. EasyJet is 71% for the rest of this year, whereas Wizz, which used to have a no hedge policy, is 44% hedged for the rest of this year, for its financial year, and Wizz's CEO admitted they were playing catch up. His words. So it's a big deal for the carriers that aren't as well covered. Ryanair is 80% hedged for the rest of its 2023 financial year.
So that's going to really have a big impact on how much power the airlines have to keep prices attractive for consumers. In terms of demand for the coming months, to go back to what David was saying about the operational chaos, I wonder if prices are going up, as we know, they must, if many passengers this summer have had a quite stressful airport experience, I wonder how much impact that's going to have on not necessary travel for the coming months. So that will be interesting to see.
That's an interesting perspective too, where if people, they still want to, they still have some money for a vacation, but they either had a bad experience or they're looking at the bad experiences on TV and decide, "You know what? We'll wait until they get this sorted out." Alan, did Michael O'Leary make any reference to the airport situation yesterday?
Yes, but not really in terms that we could repeat here. He was fairly comprehensively scathing about places like Heathrow, which is, as David said, Ryanair don't actually operate into. He reckoned that the situation was slowly improving as David said, but I think he fears there will still be some lingering problems in certain places. Just picking up a point that Helen was making a few minutes ago, in fact, he said that Ryanair have now managed to hedge 90% of their fuel out to next spring at 63 or $64 a barrel. I believe it's already slightly north of a hundred dollars on the market. And for the year thereafter, they're hedged about 40% at 92 or $93 a barrel. That's out to about March 2024.
He's hoping to get to a 50% in that, but doesn't really want to go hedging any further out than that because he thinks that the oil price will drop either because there will be a resolution in the Ukraine conflict and/or if there is a global recession, he says, the demand for oil will just drop anyway, which will result in prices falling. And he doesn't want to be stranded with a whole lot of hedged, relatively expensive fuel on his books.
Essentially, hedging is an insurance and some people call it a gamble on oil prices where the airlines are essentially fixing a price ahead for the oil and, of course, hoping that they come under, if the price goes up drastically. But it can work the other way. You can find yourself where you've fixed your price and then oil comes down. And again, that's not good for a low cost carrier to suddenly find that it's paying more for its fuel than its competitors.
So I mentioned Wizz earlier, that's the Hungary-based, huge airline, went into massive growth and been very successful. They were one of the airlines that didn't hedge and they are now doing that, which shows you how people are thinking differently about their costs. Helen, Wizz went from, as I said, one of the most profitable airlines, it's now posting losses. Conversely, we've got Norwegian Air Shuttle, which was in bankruptcy and seems to be now doing a remarkable turnaround. It's now profitable. What's going on there?
That's a good question. I think it just shows how many extremely influential factors have been at play in this sector of the industry over the last few years. Wizz's no hedge policy seemed like an excellent idea when nobody was flying anywhere, but now suddenly it's causing them big headaches to the point where they've just done a complete turnaround and they are trying to catch up. Wizz was being praised for continuing to expand and grow throughout the pandemic. I think partly it's bad luck. It was affected more than other carriers by the airspace closures because of the Ukraine invasion. I think it, like other airlines, has seen a big impact on its operations because of the disruption.
Conversely, yes, as you said, Norwegian, I think people were reading it the last rites in 2019, I think it was. It didn't seem as if it could really come back in any meaningful way, but the last report from Norwegian about a week ago, it was profitable. It has its orders from Boeing back on track. It's concentrating very sensibly on short haul growth, leaving the kind of risky north Atlantic business to other startups. So I think things look a bit more stable for that airline. So yes, two years is quite a short time in airline world.
That is very true. David, Ukraine's been mentioned a couple of times, and as you say, that's particularly affected Wizz, I think, in this market. But how have you seen the LCCs adapting their route net structures generally over this past year or so, and maybe in particular in terms of Ukraine?
So in the early days of the war, obviously LCCs cut their flights to Ukraine and Russia. And I think Wizz was the only EU airline that had bases and aircraft in Ukraine prior to the war, and it had big expansion plans there prior to the invasion. Since then, it's redeployed capacity elsewhere in its network. But the main thing since then, as we've already discussed, obviously for European LCCs, has been the rising fuel prices. And I think, in response to that, we are seeing carriers trim their schedules to better match supply and demand and focus on the markets that are going to be the most profitable.
I was looking at some OAG capacity data earlier for the fourth quarter of 2022, and at the start of August, LCCs were planning to operate about 119 million seats during the period. Now, that's been reduced. They've taken a million seats out of the market since then, and I think we're going to start seeing more seats coming out of the market as we get towards the winter season. And that's obviously going to mean frequency cuts and route suspensions, probably with some destinations dropped from airlines' networks altogether.
For example, we saw Wizz Air, earlier this month, say that it was going to temporarily suspend its base operations in Cardiff over the winter, just because it wouldn't be economically viable. And I think, as well, the level of experimentation that we saw during the pandemic, airlines were flying to... They were connecting airport posts that hadn't been connected before. They were trying to find routes that could be profitable. And I think now they're going to retreat and probably concentrate more under the larger O&D markets where they know they can make money.
And another thing that I think they're going to do is, they're concentrating on the airports that are going to give them those incentives and they'll prioritize growth from those airports where they can drive the hardest bargains and get the best deals. So we recently saw in Hungary, the government there introduced a tax on the airline sector, which is about 10 to $25 for departing passengers. And as a result, Ryanair canceled eight routes from Budapest and it's cut frequency on about seven more. And I think, if airports and governments increase charges, we're going to see LCCs reduce schedules, reduce routes from those airports.
So essentially, a more ruthless approach to keeping a real focus on the business. And if it doesn't work, the airlines, especially the low cost carriers, are willing to say, "We can't make that work. We can't make that viable." With all this going on, are the LCCs still buying new aircraft? Alan, you were at the Farnborough Air Show fairly recently. Was there-
I was. But once again, I have to go back to Ryanair here. Michael O'Leary said yesterday that really his biggest concern was getting enough of his particular variant of the 737 Max 8, the Max 8-200, which he's dubbed game changer, which manages to cram in 197 seats. He said his biggest concern is getting enough of these in order to take advantages of opportunities. He's expecting 51 over the next six months or so, and was pretty scathing about what he described as Boeing mismanagement in missing production targets. He's certainly got places where he can place those aircraft. One major example of where he sees Ryanair growing is Italy. Now, pre-COVID Ryanair was already the biggest operator there with around 30% of the market. That has now lept to 45%, and he expects it to reach 50% by the end of this year. He took 73 of these 737s from Boeing over the summer and has put no fewer than 30 of them into Italy.
So yes, obviously, that's a good example at Ryanair of their still buying new aircraft and they're not just for replacement. They're actually for growth as well and new markets. So overall, I think what I'm hearing today is that there's a lot for the low cost carriers to be dealing with across Europe, but also a lot of optimism and certainly no shortage of competitive spirit. So thank you, Helen, Alan and David. Thank you so much for joining me today, and thank you also to our podcast producer, Gary [inaudible 00:20:25] and to our listeners for joining us. Please tune into us next week on Apple podcasts or wherever you listen. This is Karen Walker signing off from Window Seat.