‘We’re in a downturn, but it is the best downturn we’ve ever had (so far)!’ Has the airline profitability bubble burst?

21 May, 2019

easyJet and Ryanair may have European-centric networks, but they are world-renowned brands having successfully surfed the LCC wave to ranked among the world's largest operators. So when either side of a May weekend both announce poor trading performance, it suggests cause for concern.

While not all airlines make money, the biggest and the best generally do, and in the case of the US majors, they make quite a lot of it. easyJet and Ryanair, with their low-cost model, pioneering attributes and innovative outlooks have developed a proposition that appeals to modern travellers. They are different in delivery, but each has been successful in its own way, against a backdrop of airline failures and financial struggles.

easyJet on 18-May-2019 revealed it had suffered its worst winter trading with a GBP275 million loss in the first half of its financial year (six months to 31-Mar-2019). The blame was firmly placed at uncertainty from Brexit, rising fuel costs, plus a GBP10 million blow from the drone disruption in Dec-2018 that closed London Gatwick airport, its largest network point. The GBP275 million loss compares with a GBP18 million loss in the same period the previous financial year.

Ryanair on 20-May-2019 announced a 29% decline in profits for the year to 31-Mar-2019, blaming a drop in fares and higher costs. Total profit for the year was down to EUR1.02 billion compared to EUR1.45 billion in 2018 despite a 7% increase in traffic. This was mainly caused by a 6% decrease in average fares. A positive was strong ancillary growth of almost a fifth (19%) but this was offset by a rise in fuel, staff and compensation costs, according to the carrier. This included a EUR200 million increase in employee cost partially owing to a 20% pay rise for pilots and a EUR50 million hike in EU261 compensation costs.

CAPA - Centre for Aviation in the Jan-2019 update of its world airline industry airline operating margin model cut the industry's forecast margin for 2019. It also introduced a 2020 forecast for the first time, modelling a decline for that year, which would be the fourth year running of falling margins from 2016's cyclical peak.

This represented the second successive time the six-monthly update of the model showed cuts to forecast margins, following four previous upgrades. This is the result of a softening global economic outlook, reflected in cuts to IMF GDP growth forecasts, which drive slower RPK growth.

[perfectpullquote align="full" bordertop="false" cite="" link="" color="" class="" size=""] "We're in a downturn, but it is the best downturn we've ever had (so far)."
Jonathan Wober, Chief Financial Analyst, CAPA - Centre for Aviation [/perfectpullquote]

CAPA's chief financial analyst, Jonathan Wober, believes the aviation industry is now in a downturn, but that what we should not panic just yet. "We're in a downturn, but it is the best downturn we've ever had (so far)," he explained during a presentation at the CAPA Airline Leader 2019 summit earlier this month. The annual event, in its eighth year at the Powerscourt Hotel Resort & Spa in Enniskerry, County Wicklow, to the south of Dublin, was this year tilted 'Making Money' and looked at how in constantly changing environment, the industry can continue to develop.

"It's economics so it's all about supply and demand," Mr Wober at the start of his presentation, but that was the only bright spot as he started to talk about freight traffic declines, a weak outlook for freight, and falling world trade volumes, all of which is directly correlated to world GDP. "Global GDP outlook is slowing," he said, to a +2.7% forecast for 2019, down from 3.1% in 2018. "This slowing GDP growth is expected to take place in most economies globally," he added, but on a positive noted "global growth is still reasonable".

But what does this all mean for airlines? Well, Mr Wober highlighted that airline margins are at historically high levels, helped by better RPK growth and better capacity discipline. He said that supply and demand balance is fundamental, but there is another crucial factor… oil. "Oil price fell between 2014 and 2016, but has risen again," he said. "Oil price is important for air fares and total unit costs and aircraft retirements are driven by fuel."

Mr Wober concluded that with an outlook where "growth is slowing, but still reasonable", a "favourable" operating profit cycle, but with supply and demand balance "tilting down" and oil "up from 2016 low" it means margins "are falling, but still above previous peaks". As such CAPA's world airline operating margin model predicts falling margins, but above previous peaks.

SEE MORE… You can view the full economic and financial aviation outlook delivered by Mr Wober providing a compelling review of latest global economic and trade trends, and what's in store for 2019/20.