Ryanair Led European Airline Margins this Summer

Edward Russell
November 14th, 2022 at 12:01 AM EST

Ryanair Group CEO Michael O’Leary was his usual confident self on Ryanair’s competitive position in Europe, even as many of the airline’s competitors have become fodder for takeover chatter.

Europe’s largest airline by passengers, Ryanair does not plan to actively participate in consolidation, O’Leary said during the carrier’s earnings call for the first half of its fiscal year that ended in September. He added that, with its current fleet and orders for 133 Boeing 737-8200 aircraft, the carrier can meet its growth target of carrying 225 million annual passengers by March 2026 with its own resources. Ryanair forecasts flying 168 million passengers during the year ending in March, or 19 million more than during the year that ended in March 2020.

But that does not mean Ryanair won’t take a passive role in consolidation, or that O’Leary thinks all of his competitors will be around in a few years’ time. The airline could participate in a deal by one of its competitors as part of “competition remedies,” or where Ryanair could agree to take some airport slots or aircraft as part of another airline’s deal to meet authorities’ antitrust muster, he said.

ITA Airways and TAP Air Portugal are at the top of O’Leary’s list as disappearing shortly from the ranks of independent European airlines. Air France-KLM, in a bid backed by private equity firm Certares, and the Lufthansa Group are actively courting ITA after the Certares consortium’s exclusivity period expired at the end of October; and Air France-KLM and IAG have expressed interest in TAP. Neither ITA nor TAP are particularly large European players — 0.8 and 1.6 percent, respectively, of European airline capacity in 2022, Diio by Cirium schedules show — but both serve lucrative geographies that are attractive to the major groups.

“It is inevitable in the next three-to-five years that Europe will consolidate further,” O’Leary said. “[ITA] and TAP will be taken out because they can’t continue with the state aid they have.”

O’Leary said he believes the European airline market will soon look like the U.S.: With three large, network-airline groups, and one large low-cost carrier — the latter being Ryanair, naturally — dominating the market.

EasyJet and Wizz Air, arguably Ryanair’s largest competitors in the budget segment, are “candidates for M&A over the next couple of years,” O’Leary said. It would be easy for him to say as much as the disappearance of both competitors would benefit Ryanair. But O’Leary’s comments are not entirely idle chatter; The Times of London reported in October that IAG was eyeing a bid for EasyJet.

And this is not the first time EasyJet has been subject to takeover rumors. Last year, the UK-based budget airline responded to a takeover offer from Wizz by raising £1.2 billion ($1.4 billion) from new equity to fund its growth coming out of the pandemic.

And to Wizz directly, O’Leary complimented the LCC’s eastern growth, that would almost certainly benefit Ryanair. “I like the idea that they’re going to grow the market in Saudi Arabia, in Dubai,” O’Leary said, calling the strategy “sensible.”

O’Leary’s consolidation comments come after a headline summer for Ryanair, which continues to see strong travel demand. The group posted a 35 percent operating margin on a €1.4 billion ($1.4 billion) operating profit. Revenues were up 30 percent compared to 2019 to €4 billion, and fares up 14 percent.

“We have been surprised by bookings and pricing coming out of the peak summer period,” O’Leary said, adding that bookings have exceeded expectations in September, October, and November. While showing some concern for the peak winter months, he said summer 2023 demand is likely to be high again, citing the return of Asian travelers, as well as more Americans traveling on the back of the strong U.S. dollar. Airfares next summer are likely to rise further from 2022 levels owing to capacity constraints at many of Ryanair’s competitors, O’Leary added.

In terms of this winter, O’Leary expressed some of the same caution that defined his outlook coming into the summer. Demand is “fragile,” he said, adding: “If we have an Omicron or a Ukraine, [demand] could fall over real quickly. I think we’re right to be cautious.”

On future growth, Ryanair has resumed talks with Boeing over a potential order for the 737-10, O’Leary confirmed. As such, he backs the U.S. Congress extending a waiver to new safety requirements that would allow the as-yet uncertified Max 10, as well as the Max 7, to have common cockpits with other 737 models. The waiver currently expires at the end of the year.

Edward Russell

Latam Looks Forward From Bankruptcy

Latam Airlines Group is back from its trip through U.S. Chapter 11 bankruptcy, emerging with a much lower non-fuel cost structure. Its labor costs during the third quarter declined by a third from 2019 levels, depressed by a 25 percent reduction in headcount. Some of that reduction reflects the outsourcing of many airport functions. Labor costs also declined (the above figures are all in U.S. dollar terms) with help from weak local currencies in Latam’s core markets, most importantly Brazil, Chile, Peru, and Ecuador. It closed its Argentine business during the pandemic. Unfortunately, fuel costs were 54 percent higher than they were in 2019. Revenues, meanwhile, were 3 percent lower, with passenger revenues alone down 8 percent. Taken all together, Latam’s third quarter operating margin was just 2 percent, compared to 10 percent three years earlier. Cargo was a lifesaver during the depths of the Covid crisis — it remains responsible for about 16 percent of Latam’s total revenues.

As you can see, bankruptcy restructuring doesn’t always lead to immediate margin gains, even in this case where Latam sliced $1 billion from its cost structure. Lower costs, of course, will help moving forward, facilitating the launch of new routes that might otherwise have lost money had costs not fallen. Latam’s Brazilian operation, in fact, has already added ten new destinations since the start of the pandemic with Passo Fundo joining the list as destination number 11 next year (see Routes). The group as a whole plans 36 new routes in 2023.

Management points to other reasons for optimism: a newly-approved joint venture with Delta Air Lines, for one, and a loyalty plan with some 40 million members. Lima, Santiago (Chile), and São Paulo are Latam’s three core hubs, reaching cities as far as Johannesburg, Los Angeles, Paris, Sydney, and Tel Aviv. It’s going all Boeing for its widebody fleet with the exit of its Airbus A350s, and all Airbus for narrowbodies, including A321XLRs from the middle of the decade. Latam says demand remains strong looking into December and January, which are peak summer months in South America.

Jay Shabat

Azul Eyes Deeper JetBlue Ties

Brazilian airline Azul could forge deeper ties with partner JetBlue Airways, CEO John Rodgerson hinted at last week. “We have opportunity to do other things with other airlines, more specifically JetBlue in Fort Lauderdale,” he said during Azul’s third-quarter earnings call.

The two airlines, both founded by entrepreneur David Neeleman, already cooperate. “Today, we have a codeshare, a large codeshare with them,” Azul Chief Revenue Officer Abhi Shah said. “Frequent flyer hopefully is on the table as well there. We have a good base of customers in South Florida. They obviously have a huge base of customers in South Florida. So that would be interesting as well. But we’re looking to evolve those conversations and strengthen our partnership.” Azul and JetBlue’s current codeshare covers more than 25 U.S. cities and another six in the Caribbean, including the recent addition of Nassau in the Bahamas.

Shah also mentioned JetBlue’s pending merger with Florida-based Spirit Airlines, which would make it an even more attractive partner. “We’re excited about what they can do with Spirit as well in the future.” Azul currently serves two cities in the U.S. — Fort Lauderdale and Orlando. Both are major markets for JetBlue and Spirit.

For Azul, United Airlines represents a potential complication to deeper ties with JetBlue. The Chicago-based carrier is an Azul shareholder, and at one time limited the Brazilian carrier’s ability to work with other airlines. The original United commercial contract with Azul has since expired, however. Rodgerson said his airline still has a “very friendly relationship” with United, and the two continue codeshare with each other. “So we’re talking to them, but there’s no urgency to do something at this time … when we did that original agreement, we didn’t even fly internationally, right?”

Azul’s international footprint is small. It serves just six non-Brazilian cities this quarter, only three of which are outside of South America — Fort Lauderdale, Lisbon, and Orlando — Diio by Cirium schedules show. That’s despite flying ten widebody aircraft, including nine Airbus A330s and one A350-900, according to Cirium’s Fleets Analyzer. Though predominantly a domestic airline, Azul has shown inclinations to expand internationally. Just prior to the pandemic, for example, it planned on flying to New York. It retains a financial interest in TAP.

The Brazilian domestic market, however, accounts for the lion’s share of Azul’s business. During the third quarter, the company rode extremely strong revenue trends to a 9 percent operating margin, overcoming significant cost challenges. This 9 percent figure marks a steep drop from the nearly 19 percent it managed in the same quarter of 2019. That year, however, was an unusually profitable one for Azul, as well as for rivals Latam and Gol, thanks to the demise of a fourth competitor, Avianca Brazil.

Azul took the subtraction lesson to heart. Having seen the benefits of a four-airline market become a three-airline market, Azul attempted to make it a two-airline market by plotting to merge with Latam after its parent filed for bankruptcy. The effort fizzled, but consolidation likely remains top of mind.

Besides its potential to work more closely with JetBlue, Azul hopes to boost earnings by modernizing its fleet, taking advantage of secondary Brazilian markets that its rivals do not serve, and growing three key auxiliary businesses, specifically its tour and cargo operations, and its 15-million-member loyalty program. All three, Neeleman said during the third-quarter call, are “key contributors to our industry-leading margins.” Corporate fares in Brazil are at record highs. And Brazilians are traveling more thanks to more flexible work arrangements.  

Capacity growth will be “disciplined,” especially in light of high fuel prices that Azul says are about $1 dollar per gallon more expensive in Brazil than they are in the U.S. due to high taxes. It will, however, expand significantly from Sao Paulo’s downtown Congonhas airport starting in March, after the government awarded it more slots. “We’ll go from 20 departures a day to about 42 departures a day,” said Shah.

Jay Shabat

IndiGo to Extend Leases, Wet-Lease Aircraft for Growth

It’s less than 20 years old, but IndiGo dominates the domestic airline scene in India, a country with more than a billion people. A close relationship with Airbus helps explain its success — no airline in the world has more A320neos on order. It gained further prominence by hiring KLM’s esteemed former chief Pieter Elbers to be its leader. IndiGo is now growing its international network faster than domestic, focusing on destinations reachable with its A320neos. Longer-range A321XLRs will expand its options in the years ahead.

But does IndiGo make good money? It earned an underwhelming 6 percent operating margin in 2019, the last full year before the pandemic. Just to achieve that, give a lot of credit to the collapse of rival Jet Airways. IndiGo, alas, lost money in 2018. And 2022? The June quarter was decent, with the post-pandemic traffic revival underpinning a 7 percent operating margin. In the September quarter, though, IndiGo fell to a small operating loss. That’s an offpeak period in India for sure, one which was even more negative for the airline than three years ago.

Things would have been better were it not for operational disruptions, some associated with Airbus delivery delays and spare engine shortages. “This has affected our operations … and has impacted our ability to fully deploy capacity productivity,” executives said last week. IndiGo is now looking to keep older planes longer than intended, and adding capacity via wet-leases — it’s reportedly planning to wet-lease widebodies from Turkish Airlines (see Feature).

IndiGo is separately forming new codeshare partnerships, including a new one with Virgin Atlantic. It’s debuting dedicated cargo flights as well. Will the company make money this quarter? It’s “reasonably confident” it can, though high fuel prices and the strong dollar are major wildcards. On a more positive note, these headwinds are hitting rivals like SpiceJet more severely. Ultimately, IndiGo says its future success will rest on four pillars of service: on-time performance, affordable fares, excellent network coverage, and hassle-free buying and flying.

A quick follow-up on India from MakeMyTrip, an online travel retailer: It said during its third quarter earnings call that visa issues are holding back the outbound international demand recovery. Domestic leisure traffic, by contrast, has recovered to more than 100 percent of its pre-pandemic level. More Indians are taking multiple short holidays on long weekends, and traveling to nearby getaways within India. Expect more tourism growth in the future: As MakeMyTrip noted, the Indian government estimates that by 2030, the tourism sector will contribute $250 billion to the country’s economic output, up from an estimated $150 billion in 2024. The aspiration is to reach $1 trillion by 2047. The country is building and expanding airports. Its airlines are adding planes. With China apparently losing its status as an economic and tourism growth engine, the hope among some is that India can assume that mantle.

Jay Shabat

Aegean, Fraport Buoyed by Strong Greece Demand

Aegean Airlines generated an impressive 28.8 percent operating margin in the third quarter, more than 3 points higher than in 2019. And Aegean’s results were third only to Pegasus and Ryanair, which posted 42 percent and 35 percent margins, respectively, during the red-hot summer travel months of July, August, and September. The Greek airline reported a €121 million ($123 million) net profit in the period.

Why was Aegean’s business on fire? Greek beaches, obviously. Since the pandemic recovery began in 2020, leisure travelers have shown an overwhelming preference for outdoor destinations, be they beaches or mountains. This has turned some airports in otherwise sleepy locales before the crisis into travel boomtowns during the recovery. In Greece, airports serving beach spots, like Chania, Corfu, and Santorini, saw 30-percent plus increases in seats during the first nine months of the year compared to 2019, according to Diio by Cirium schedules.

And travelers are filling many of those additional seats. The number of international visitors arriving in Greece by plane was up 4 percent to 3.1 million in September compared to 2019, according to data from the Greek Tourism Confederation. International arrival numbers were flat at 18.5 million for the first nine months of 2022 — an impressive result given numbers were down by more than half in January.

“Vacation and flying to Southern parts of Europe is on a very, very high preference for the population,” Fraport CEO Stefan Schulte said last week. His comment was in response to questions over the airport operator’s outlook, and he should have a good idea — Fraport manages 14 airports in Greece, including many in beach spots as well as the country’s busiest, Athens.

Schulte said, based on current data, Fraport expects a year-over-year increase in passenger numbers across their facilities next year despite the macroeconomic concerns. Of Fraport’s airport portfolio, which includes the major Frankfurt hub, only those in Greece handled more passengers in the third quarter than they did in 2019; traffic was up 9 percent to 16.7 million passengers.

Fraport posted earnings before interest, taxes, depreciation, and amortization of €420 million in the third quarter, only 4 percent below 2019. Its airports handled 57.2 million passengers, or down 13 percent from three years earlier. Frankfurt, Fraport’s busiest airport, saw passenger traffic recover to 74 percent of 2019.

“We are pleased to have successfully navigated multiple challenges, delivering strong profitability and indeed one of the best set of results for our industry,” Aegean CEO Dimitris Gerogiannis said. While the airline did not provide a fourth quarter or winter forecast, he did say they were “confident” in the outlook “despite the geopolitical and economic headwinds.”

Aegean is scheduled to operate 20 percent more capacity in the fourth quarter than it did three years ago, according to Diio. In the third quarter, Aegean reported flying just 97 percent of its 2019 capacity.

As at most airlines in the third quarter, Aegean generated more revenue than in 2019 despite less capacity. Revenues increased 11 percent year-over-three-years to €571 million. Revenues for every seat kilometer flown were up nearly 18 percent, while the cost for flying those same seats excluding fuel was up 6 percent.

Aegean is not expected to produce such buoyant margins in the fourth quarter due to the seasonality of its traffic, which peaks during the summer.

Edward Russell

In Other News

  • Other earnings briefs: The mighty Emirates, flexing its muscles from Dubai, disclosed a $1.1 billion net profit on $13.7 billion in revenues in the first half of its 2022-23 fiscal year ending in September, without giving much more meaningful detail than that. The airline said demand is still strong but “the horizon is not without headwinds, and we are keeping a close watch on inflationary costs and other macro-challenges such as the strong US dollar and the fiscal policies of major markets.” Air Arabia in neighboring Sharjah, a low-cost carrier flying only narrowbodies, enjoyed a fruitful third quarter, earning a 21 percent operating margin (versus 13 percent three years earlier). Forming joint venture airlines is a favorite pastime for Air Arabia, opening new ones in Abu Dhabi, Sudan, Armenia, and Pakistan, joining more established ones in Egypt and Morocco. Moving on to the Philippines, the LCC Cebu Pacific fared much worse, in an Asian market not yet fully free of Covid travel restrictions. Its operating margin was negative 18 percent, compared to positive 15 percent in the third quarter of 2019. Now for the best result of the quarter: Turkey’s Pegasus, feasting on inbound tourism, rocketed to the top of the worldwide margin rankings with a stunning 42 percent margin. It’s a very seasonal airline to be sure — its third quarter 2019 operating margin was almost as spectacular at 40 percent. Whatever the seasonality though, 42 percent is 42 percent.
  • Colombian authorities dealt Avianca and Viva Air a blow when they blocked the airlines’ merger last week. Aerocivil, Colombia’s civil aviation regulator, cited competition concerns and the lack of potential remedies for the decision. It also questioned whether Viva Air was in such a serious financial state that a merger was necessary to save the airline. Adrian Neuhauser, CEO of Avianca, said the decision “ignores the potential effect that the disappearance of Viva would have on users and the market.” Aerocivil said it would reconsider the airlines’ application if they include competition remedies. The Avianca-Viva Air merger approval is separate from the proposed combination of Avianca and Gol to create the Abra Group.
  • Things appear to have gone from bad to worse at Norwegian startup Flyr. After the airline failed to meet its subscription target on a 430 million Norwegian kroner ($42 million) private placement last week, the board approved an alternate proposal that could raise up to 700 Norwegian kroner by end-March. And Flyr did successfully raise 250 million Norwegian kroner under the first tranche of the latter proposal, with proceeds from the deal needed to “bring the company through” the first quarter. But getting through the cold and dark first three months of the year is not the only challenge for Flyr, the airline will need to raise additional capital in order to make an emissions trading payment in April 2023, and to maintain its required capital buffer. Let’s not forget: Airlines fail when they run out of liquidity. Flyr, facing stiff competition from a resurgent Norwegian Air, has already made deep cuts to its winter schedule, including parking more than half its fleet and suspending almost all domestic Norway routes. In October, Norwegian Air CEO Geir Karlsen said the Norway market faced “overcapacity,” and cited Flyr.
  • In people moves, Cathay Pacific has promoted its customer and commercial chief, Ronald Lam, to CEO following the retirement of Augustus Tang at the end of December. Lavinia Lau will replace Lam as Chief Customer and Commercial Officer, and Alex McGowan has been promoted to Chief Operations and Service Delivery Officer from April 1 following the retirement of Greg Hughes.

Edward Russell & Jay Shabat

Edward Russell
November 14th, 2022 at 12:01 AM EST

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