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Impact of Recession on UK Low Cost Airline Industry

In this article I will talk on the two biggest low cost airlines i.e EasyJet and Ryanair’s progress during the recession and what worked for them. In an interview with Judith Bogner of Bloomberg TV, the former CEO Andy Harrison revealed the profits earned for the year 2009 came up to an amazing £43.7 million before tax, making EasyJet amongst the very few airlines to make a profit during the last twelve months of recession.  The formula of success according to Andy was their great value offering which includes great prices to the most convenient airports. EasyJet has stuck to their core values, which allowed them to do well during the recession and as business pickups in the country, they will further see many improvements which will lead to even greater profits.  In response to In response to the question on the fluctuating oil prices, he added that Easyjet’s hedging is a form of averaging, which means that their fuel prices respond with a lag to movement in market prices. So for 2010, they expect GBP100 million improvements as their fuel hedges adjust to market prices. Easyjet continues to grow steadily and they have expectations of 10% increase in capacity during 2010 as the passeneger numbers grew by 3 to 4 percent during the recessionary period. Easyjet remains focused on short haul a flight which proves to be working as they seem to be in line to achieve growth plans of 7 to 8 percent annually. The passenger growth easily outstripped easyJet's capacity increase over the recessionary period of just 0.8%, indicating that demand is still matching its growth strategy despite the Europe-wide recession.

Gert Zonneveld, analyst at Panmure Gordon, said easyJet had weathered the recession so far but a lengthy downturn could dampen the airline's recovery. "The company is performing well given the current economic environment, but a sustained downturn could clearly delay a profit recovery."

Ryanair’s CEO Michael O’Leary commented on the tough recessionary times the airline industry was facing and he added “Ryanair’s ability to grow both traffic and profits during the half year is a testament to the strength of Ryanair’s lowest fare model, and our relentless cost discipline. However these results are heavily distorted by a 42% fall in fuel costs, which has masked a significant 17% decline in average fares.  We expect average fares to decline by up to 20% during Quarters 3 and 4, which will result in both these quarters being loss making.  Despite this our full year guidance remains unchanged and will be substantially profitable, at a time when many of our competitors are losing money, consolidating or going bust.  Recent weeks have seen the demise of SkyEurope and Seagle Air in Slovakia, and MyAir in Italy, and we expect further casualties this winter.  Ryanair is the only major European airline to grow traffic and profits strongly.  We are winning substantial market share from the big three high fare flag carrier groups led by Air France, BA and Lufthansa and we expect this trend to continue”

Ryanair’s relentless focus on costs continues to deliver savings.  While fuel remains unpredictable, they have continued to decrease airport and handling costs, through our web check-in initiatives, and staff costs, with a pay freeze in both the current and coming year.  At a time when many competitors are cutting pay and jobs, Ryanair continues to provide safe and sound employment without pay cuts. Some of the major highlights that took place in the first half of 2009 in the recessionary period are as follows: 

·        Average fares down 17% to €39.

·        Traffic growth up 15% to 36m pax.

·        Net profit up 80% to €387m.

·        Industry leading net profit margin of 22%.

·        Ancillary revenues grew 8% to 20% of total revenues.

·        Unit costs down 27% (ex fuel costs down 5%).

·        100% web check-in from 1st October.

·        Fuel hedges extended for fiscal 2011, Q.1 to 50% and Q.2 to 50%.

 

 Despite the economic gloom, British consumer like travelling during the summers and things are not looking all that bad as the passenger numbers for both Ryanair and easyJet have continuously increasing and load factors have remained above 80% in spite of the fact that Ryanair didn’t have a great third quarter in 2008 as they did bear a loss of EUR102 million, a swing of EUR147 million compared to 2007, and easyJet's 2008 year-end results were down 45% to £110 million (figures from Deloitte's Executive Report). However customer demand is still going strong but, during these complex economic times both holidays and business passengers are looking for the best value available. Given the strong cash positions of both Ryanair and easyJet, there is evidently plenty of growth in the low cost sector to see this recession through.

 

. Being a large business with large capital requirements and barriers to entry, the supply of airlines is quite inelastic as there is no easy entry or exit. However, the demand is elastic as customers have choices to use other airlines to travel as the industry has become quite competitive. However, during the times of recession, the two low cost airlines, Easy jet and Ryanair managed to do well as they realized the elasticity of demand and focused more on customer retention and satisfaction. This is one reason why the two airlines did well during the recession.

 

Bibliography

 

Find Articles (2009) Easyjet CEO Andy Harrison on Bloomberg TV, retrieved from:

http://findarticles.com/p/articles/mi_8077/is_20091117/ai_n50971666/

Dan Milmo (2009) EasyJet weathers recession but losses widen, retrieved from:

http://www.guardian.co.uk/business/2009/may/06/easyjet-weathers-recession-but-losses-widen

Financial news (2009) Ryanair Half Year Results- Profits rise 80% and fares fall 17%, retrieved from: http://finchannel.com/news_flash/Travel_Biz_News/50839_Ryanair_Half_Year_Results-_Profits_rise_80%25_and_fares_fall_17%25/