EasyJet Profits on Privileged Airport Positions

Jay Shabat

December 5th, 2022 at 12:01 AM EST

In the rabidly competitive airline industry, profits don’t come easy. Europe’s low-fare giant EasyJet, however, has found a way.

Last week, the orange-colored carrier reported financial results for its fiscal year that ended in September (it reports just twice a year, not quarterly). To summarize, EasyJet posted a big operating loss during the first half (October 2021 to March 2022). It then negated that with a near-identical profit from April-to-September. Its full-year operating result was thus more or less break even. But the spring and summer peak periods were pretty good, delivering a solid 12 percent operating margin. That was better than the margins recorded by International Airlines Group (11 percent), Air France-KLM (9 percent), and the Lufthansa Group (8 percent) during the same six-month period.     

To be clear, EasyJet is no Ryanair when it comes to profitability. Never has been. Probably never will be. Ryanair’s operating margin over that same April-to-September period? 25 percent. And unlike EasyJet, whose 12 percent figure marked a five-point deterioration from the same period in 2019, Ryanair earned higher margins this spring and summer than it did in 2019. O’Leary clearly has the better business model.

But that doesn’t bother Johan Lundgren, the CEO EasyJet since late 2017 and who previously worked at the tour operator TUI. Lundgren’s EasyJet has found a way to earn solid if unspectacular profits, largely by building a network that avoids excessive overlap with Ryanair. Instead, EasyJet competes more directly with higher cost carriers — including British Airways, Lufthansa, and Air France — and tour operators like TUI.

Take the London Gatwick to Palma route as an example. Last quarter, it was EasyJet’s second busiest by number of seats, according to Diio by Cirium. Its two main rivals on the route are British Airways and TUI. Wizz Air, once with Ryanair-like margins, has jumped in more recently. But unlike Ryanair, Wizz has failed to take advantage of the demand recovery, losing money in the combined spring and summer periods (more precisely, Wizz Air’s spring was lousy; its summer was pretty good). Remember too that Thomas Cook, once a major EasyJet rival, collapsed just before the Covid crisis. EasyJet’s busiest route today is Milan-Catania in Italy, where it has joined Ryanair and Wizz preying on the old Alitalia and its successor ITA Airways. Italy, in fact, is EasyJet’s third largest country market. The UK is number one. And second is France, where it makes a living causing headaches for Air France, not an airline known for low costs.   

Though it shuns London Heathrow and no longer serves Frankfurt, EasyJet isn’t shy about concentrating capacity in higher-cost airports. It’s especially fond of slot-controlled airports where competitive pressures are constrained, allowing for higher yields. The airline has spent years amassing large slot portfolios at London Gatwick, most importantly, but also Paris Charles de Gaulle and Orly. It recently won more slots in Lisbon, where it impressed officials with its promise to fly 235-seat Airbus 321neos, bringing more capacity than what Ryanair could with its 189-seat Boeing 737 Maxes, or Vueling could with its 180-seat A320s. EasyJet says its financial returns are highest flying from slot-controlled airports, including those serving leisure markets in Greece, a major area of expansion for the airline.

Switzerland, meanwhile, is another high-cost airline market where EasyJet happily competes, undercutting — in this case — Lufthansa Group’s subsidiary Swiss. Geneva, in fact, is EasyJet’s second busiest airport after Gatwick this quarter. As a major ski destination, Switzerland is also an important offpeak winter market. Summer beach markets in Portugal, Spain, Italy, and Greece, however, are where EasyJet shines, especially from slot-controlled (read higher-yield) origin markets like London and Milan. It’s big in secondary UK cities as well, and in UK domestic markets where Ryanair no longer competes and Flybe is a shadow of its former self. British Airways too, is flying many fewer domestic UK seats today than it was pre-pandemic. A current area of strength for EasyJet are longer-haul leisure flying to markets like Turkey and Egypt, where Brits and Europeans can still take advantage of favorable currency trends.  

There’s more to EasyJet’s success than its network. No less critical are ancillary revenues, which have grown sharply on a per-seat basis from even 2019. The airline has added more products and services to sell. It’s improved its pricing and distribution. Ancillaries now generate about 30 percent of total revenues, up from closer to 20 percent prior to 2020. A big change came last year, when the airline started charging for carry-on bags stored in overhead bins. Looking ahead, a partnership with Datalex, which helps airlines merchandise their ancillary products, aims to yield future benefits.      

At his previous job with TUI, Lundgren gained experience with tour packaging. He’s since adopted the model within EasyJet, launching a Holidays division in 2019. The thinking: Nearly 85 percent of the airline’s customers are flying for leisure, typically booking a hotel and other travel products alongside their flight. So why not utilize EasyJet’s website to sell those products itself, earning commissions from other travel companies? It’s a line of business that’s proved nicely profitable for British Airways, Virgin Atlantic, and the British low-cost carrier Jet2. Sure enough, it’s proving nicely profitable for EasyJet too. In its latest fiscal year, EasyJet Holidays earned a nearly $50 million operating profit on $450 million in revenues, good for a double-digit margin. Profits are on track to eventually hit $120 million. Management expects the number of passengers booking a holiday package with EasyJet to grow some 30 percent next year, with plans to expand the concept to more countries across Europe, beyond the UK. It also claims EasyJet Holidays runs significantly higher margins than the comparable businesses at British Airways, Jet2, and TUI, not to mention the online UK travel agency Loveholdiays. Regarding EasyJet Holidays, Lundgren told investors during the company’s earnings call: “It’s the fastest-growing, highest-margin, lowest-cost travel company in the UK with a model that is really based on very, very little risk.” In fact, the company even expects the Holiday division to make money this winter.

Making money during winters certainly doesn’t come easy for European airlines. But EasyJet thinks it can at least reduce losses, in part with help from its Holidays division but also with changes to its labor contracts. A portion of its pilots, for example, have voluntarily moved to seasonal contracts, meaning EasyJet won’t incur their wage costs during the offpeak. At the same time, a portion of its planes now operate from seasonal bases — often in lower-cost markets in southern Europe — that don’t operate from November through February.

Controlling costs, of course, isn’t just a wintertime imperative. Even if more tolerant of higher-cost airports than Ryanair, EasyJet nevertheless depends on maintaining a significant cost advantage versus the British Airways, TUIs, and Air Frances of the world. Cost control is unfortunately becoming more difficult due to inflationary pressures. Wages are up. So are airport- and aircraft-related costs. Fuel is a wildcard, with recent declines in oil prices perhaps offering some relief. More reliably though, EasyJet will look to offset inflation by sustaining its much-improved operational performance and by growing capacity, thereby improving fleet and crew utilization. In addition, EasyJet’s fleet evolution will bring unit cost savings in the years ahead.

The airline currently operates about 320 planes, 94 of those being out-of-fashion Airbus A319s with prior-generation engines. The airline plans to replace 40 percent of these in just the coming three years, mostly with larger and lower-unit-cost A320neos. It has 168 Neos on firm order, including some A321s, renowned for their cost efficiency. These larger A321neos will fit well flying easy-to-fill, longer-haul leisure routes to the eastern Mediterranean, for example, from slot-controlled airports where capacity growth is otherwise difficult. More than 80 percent of EasyJet’s all Airbus narrowbody fleet, importantly, still flies with prior-generation engines (Ceos, in other words, not Neos). For the record, roughly 40 percent of its planes are leased. It owns the others, boosting a low-debt balance sheet judged investment grade by key ratings agencies.

Unlike Ryanair or Wizz, EasyJet remains smaller today than it was in 2019. Diio shows its fourth quarter seat capacity down 16 percent from three years prior. Much of that flying has come out of the German market, having exited not just Frankfurt but also Düsseldorf, Stuttgart, and other cities (it’s gone from Vienna too). It’s a lot smaller in Berlin now as well. Other places where it’s still large but much smaller than it was include London Luton, London Stansted, Amsterdam, Barcelona, and Venice. On the other hand, it’s grown aggressively in Greece, Portugal, Turkey, and North Africa (specifically Egypt, Tunisia, and Morocco).

Demand overall continues to be strong, albeit with some need to discount and promote during offpeak travel periods this winter. Early booking trends for Easter, always a busy time for EasyJet, appear positive. Business travel, accounting for an estimated 18 percent of EasyJet’s traffic, is picking up. Roughly three quarters of all bookings come from returning customers who’ve flown EasyJet in the past two years. Demand trends are likewise positive for the Holidays division, where people tend to book rather early.

What about the increasingly troubled UK and EU economies? “EasyJet does well in tough times,” said Lundgren in a statement announcing the company’s financial results.

And what about the heightened talk of looming European airline mergers? Wizz, after all, even tried to buy EasyJet last year. Lundgren is skeptical. “Even if you were to speculate on these things,” he said during the earnings call. “Who would take over whom? You’re looking at some of these debt positions, and it’s not like you’re thinking that some of them are in a great position to do transactions as you come through this.”

Mergers, Lundgren’s essentially saying, aren’t easy.

Jay Shabat

Jay Shabat

December 5th, 2022 at 12:01 AM EST