easyJet counters Europe’s pessimistic mood and raises full-year profit expectations

26 July, 2012

easyJet beat the continuous run of disappointing economic data in Europe and has lifted its full-year pre-tax profit guidance after recording a strong performance for the three months ending 30-Jun-2012. Europe’s second largest LCC in terms of passenger numbers now expects to report a profit before tax of between GBP280 million and GBP300 million for its fiscal year ending 30-Sep-2012, above analyst estimates and above the company’s reported pre-tax profit of GBP248 million in FY2011 and GBP154 million in FY2010.

easyJet’s revenues in 3QFY2012 (three months ending 30-Jun-2012) rose 11% year-over-year to GBP1 billion as passenger numbers increased 11% to 16 million and total revenue per seat grew 2.8%. The airline increased the number of seats flown year-on-year by 7.5% to 17.9 million and load factor improved 2.8ppt to 89%. The solid operating performance was coupled with a 3% reduction of cost per seat excluding fuel and follows an enhanced operating and financial performance in its typically weak 1HFY2012.

See related article: easyJet’s reduced loss in 1H2012 reflects brighter skies and higher seat revenue

easyJet select operating statistics: 3QFY2012 vs 3QFY2011

'easyJet lean' will deliver GBP90 million in cost savings in FY2012

The 3QFY2012 reduction of seat cost excluding fuel benefitted from the year-on-year change in the GBP/EUR exchange rate but it also reflects the company’s stringent cost management policy dubbed "easyJet lean".

The cost cutting scheme aims to protect and enhance the airline’s inherent low cost base which arises from its model and operating efficiency. The LCC’s CASK is not as low as Ryanair or Vueling’s, but it is still markedly lower than its full-service peers such as airBerlin and Iberia. CEO Carolyn McCall has been very focussed in trying to lower easyJet’s cost base, and has established a renewed focus on continuous cost improvements throughout the company with a weekly and monthly financial performance tracking. Focus areas of "easyJet lean" include airports and ground handling, crew, engineering and maintenance, fleet and fuel.

In commenting on the company’s 3QFY2012 results, Ms McCall said "easyJet lean" is on track to deliver GBP90 million of benefits this financial year and that “significant” savings have been achieved from renegotiating over a third of ground handling contracts. The savings will offset some inflationary cost increases in areas such as airport charges in regulated airports.

easyJet growth in seat revenue slows

EasyJet increased total revenue per seat by 2.8% on the year-ago period to GBP57.59 and this is mainly due to a better seat occupation ratio driven by strong demand on beach routes from the extended period of inclement weather in Northern Europe. Also a tactical deployment of capacity to growth markets and strong performance from fees and charges and first bag revenues (increasing by GBP1.20 to GBP11.81 per seat) pushed total revenue per seat up. The EUR/GBP currency movements, however, partially offset the gains. On a constant currency basis the group’s underlying total revenue per seat rose 4.7% in the reporting quarter.

Still, the quarterly increase is clearly lower than the growth rates it recorded in the past four quarters.  

The LCC’s non-seat revenue (revenue from car rental and travel insurance) in 3QFY2012 fell 8.2% year-on-year to less than a GBP1 on a per seat basis. easyJet blamed the drop on the “continued structural decline in the travel insurance market” and said it continues to drive new sources of non-seat revenue. It recently introduced new products such as missed flight insurance, and its hotels offering has been enhanced by a new hotel provider.

easyJet total revenue per seat (RPS) growth and capacity changes: 3QFY2011 to 3QFY2012

Network expansion centres on France, Switzerland, Italy and Portugal

easyJet’s strategy of improving returns and driving profitable growth continues to shape the structure of its network and capacity is allocated to routes which deliver optimal annual returns and growth. Capacity growth in 3QFY2012 focused on France, Northern Italy, Switzerland and Portugal.

It increased capacity by 13% in France and Switzerland and by 6% in Italy, where it has a base at Milan Malpensa Airport. The UK-based LCC is the largest operator at the airport and has a approximate 29% share of seat capacity, according to schedules in Innovata for the week of 23-Jul-2012 to 29-Jul-2012.

easyJet said that its recently opened bases in Nice and Toulouse have experienced “strong initial” demand with summer load factors ahead of the company average. The airline stationed an Airbus A319 aircraft at each of the French airports in Mar-2012 to support the launch of 12 new routes as it works to cement its position as France’s second largest carrier and gain market share from Air France. easyJet already had bases at Paris Orly Airport, Paris Charles De Gaulle and Lyon. It carried 11 million passengers on its French network in 2011.

See related article: Transavia France is spreading its wings to regional airports in its home market

In Apr-2012, easyJet also opened a base in Lisbon.

See related article:  TAP Portugal’s is moving slowly as potential bidders keep their interest subdued

Conversely, the airline intends to cease basing crew and aircraft at Madrid Barajas Airport from winter 2012/13 as it delivered the lowest returns across the network. Also Ryanair has announced major cuts in its Spanish network as the economic crisis in Spain deepens and airports increase charges and lower incentives.

easyJet network expansion is focusing on four countries in Europe

New fleet options include CSeries

easyJet is pursuing its analysis of a new aircraft acquisition and a decision is expected in 4Q2012. The airline started the technical evaluation of the next generation of future engine technology and single aisle aircraft available in Sep-2011 and a commercial evaluation was conducted in recent months. During its investor day in Jan-2012 easyJet said it was looking at the Airbus A320neo family aircraft, the Boeing 737MAX family and the Bombardier CSeries and the new engine options from CFM (the CFM LEAP engine which power the A320neo and 737MAX) and Pratt & Whitney (P&W PurePower PW1000G which is the powerplant of the CSeries and A320neo).

“As part of the commercial process the next step will involve seeking indicative pricing from manufacturers to determine the capital costs and therefore the returns associated with a future fleet order. Given the likely size of future orders for a new generation of more efficient planes, easyJet will ensure shareholders are consulted and have the opportunity to vote on future new generation aircraft orders, if any,” easyJet noted in its 3QFY2012 results presentation.

The airline in 3QFY2012 took delivery of 12 A320 family aircraft and returned five A319s to lessors. The airline is looking to increase the mix of A320s in fleet to deliver reduced operating and capital cost per seat. At 30-Jun-2012 easyJet’s fleet was comprised of 211 aircraft – 50 A320s and 161 A319s. All aircraft are what management calls “easyJet specification aircraft”; the A319s are configured with 156 seats and the A320 with 180 seats.

Utilisation of the owned fleet in the quarter was a similar level to that of the prior year at an average 11.3 block hours per day. The group targets a 70/30 ratio of owned/ leased aircraft.  

easyJet has calculated the return per aircraft as per a request of the largest shareholder easyGroup, the company controlled by easyJet founder Stelios Haji-Ioannou. easyGroup and Mr Haji-Ioannou have repeatedly challenged–and criticised–the easyJet board for delivering poor shareholder return and ordering too many aircraft without the proper tendering. Most aircraft in the easyJet fleet earn average returns and A320 aircraft deliver better returns than the A319, the carrier concluded.  

easyJet contribution per aircraft for rolling 12 months to 31-Mar-2012

Improved performance for the full year  

easyJet will continue its strategy of capacity discipline for the remainder of its fiscal year and is planning to grow capacity by 6.5% year-on-year in 4QFY2012, its busiest quarter. Around three quarters of its available summer seats are now booked, which is in line with the previous year, and revenue per seat during the last quarter of its fiscal year should grow at a similar level to the 2.8% increase seen in 3QFY2012.

As Ms McCall pointed out, “In a tough economic environment easyJet’s low fares, strong brand and great network supported by tight cost management, strictly managed allocation of capital and strong operational performance leaves it well placed to continue to deliver strong returns for shareholders”.