Europe Airline Daily: easyJet predicts rivals will perish as fuel soars
08-May-2008 |
easyJet CEO, Andy Harrison, has predicted Europe’s weaker carriers will “downsize and disappear”, as the “laws of the jungle” play out under extreme fuel prices and continued expansion by the leading LCCs. Mr Harrison stated airlines that operate older, less fuel-efficient fleets and have higher cost bases are vulnerable.
The prediction follows statements last month by bmi Chairman, Sir Michael Bishop, that the slowing economy and record fuel prices would lead to a clear division of airlines into the "haves and have-nots". The airlines that continue in the current difficult conditions “would be determined largely by their fuel hedging positions”. Start-up airlines and airlines with insufficient scale were most vulnerable, said Sir Michael.
Citing a slight increase in forward bookings for the peak Summer travel period, compared to this time last year, easyJet is forging ahead with its growth plans. Mr Harrison stated that the travelling public may be “choosing their airlines more selectively because they're under financial pressure”, but predicted easyJet would “continue to win through, because we offer fantastic value”.
The industry has entered the ‘perfect storm’ conditions which carriers like easyJet and Ryanair have been awaiting for some time. Further rapid capacity growth by the lowest cost producers will put extreme pressure on less efficient rivals, and a resulting shakeout will ultimately benefit the surviving airlines. Mr Harrison stated, “I see a number of desperate airlines who will be facing significant financial problems. We are looking at reduced profits. That's not nice, but it's a lot better than looking at significantly increased cash flow problems”.
easyJet carried 3.6 million passengers last month, up 13% year-on-year, while load factor fell 3 ppts to 80.1%. Ryanair this week reported a 4 ppts fall in load factor in Apr-08, although the early Easter this year could explain some of the weakness. A longer-term moving average of Ryanair’s load factors shows that demand is not keeping up with capacity expansion, particularly since mid-2006. However, the carrier is unlikely to make significant changes to its immediate growth plans, if it senses weakness at rival carriers.
Ryanair monthly passenger load factor and 12 month moving average: Jan-05 to Mar-08
Source: Centre for Aviation & company reports
Further pressure will be applied to industry load factors, as travel costs increase with airlines passing on fuel costs in the form of higher fares.
easyJet plans to raise its average fares by around 10% - or GBP4 per sector - after its first half losses quadrupled, due to the record price of oil and costs associated with the acquisition of GB Airways. The carrier is also relying increasingly on ancillary services to raise additional revenues.
Perhaps more important than fuel costs, the added concern, particularly for easyJet and Ryanair, is a slowdown in the UK economy. The latest leading economic index suggests further slowing of the UK economy in the near term, which would hamper easyJet’s growth plans (some 70% of easyJet's capacity is focused on the UK market).
Overall, the European market is now delicately poised. Some significant structural changes could be imminent, as the “laws of the jungle” prevail. 2008 appears likely to define the shape of the short haul market for the medium term. |
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Europe Airline Daily: easyJet predicts rivals will perish as fuel soars 
