Divergent performance from Europe’s low cost carriers

Q3 performance

I’ve been catching up on the recent results from the big European low-cost carriers. We saw that the network players showed a decent recovery in the September quarter, with positive operating results for Lufthansa Group and Air-France-KLM and significantly reduced losses at IAG. The low-cost airlines have generally done better during the worst months of the pandemic, benefiting from their more variable cost bases and lower reliance on business traffic. What does their Q3 performance tell us about how well each is managing the recovery phase?

Let’s start by looking at the reported profits.

Source: Company reports, GridPoint analysis. Percentages show profit margin as a % of revenue.

Ryanair was clearly the best of the three, with an operating profit of €254m and a margin of 14.2%. That’s still way down on the €1 billion they made in Q3 of 2019, but quite impressive in the circumstances. After financial expenses, that translated into a pre-tax result of €225m. They guided for a continued recovery for the second half of their financial year, which ends in March 2022, with a full year pre-tax loss of between €100m and €200m. If they achieve somewhere around the middle of that range, that would suggest approximately breakeven for the second half at an operating level.

The results from Wizz were less impressive. They managed a small operating profit of €57m, but that was more than wiped out by escalating financial costs and a big exchange rate loss, leaving them with a €6m pre-tax loss overall. More worryingly, they gave guidance for operating losses of €200m in the third (December) quarter and indicated that “The Q3 loss may carry over into the last quarter of the fiscal year depending on the operating conditions in the quarter”. Substantially worse than the guidance from Ryanair and actually 40% worse losses than they incurred for the same quarters last year.

easyJet was worse still. The September quarter is a year end for easyJet, so they don’t announce the quarterly results as they do in the other quarters. So far, all they have given us is a figure for the full year figure for “headline loss before tax” of between £1,135 million and £1,175 million. That suggests that the September quarter was around £100-150m (€115-170m) loss-making at an operating level. They declined to give any guidance for future periods.

If you plot the rolling twelve month figures for pre-tax profits, the divergent trend in profit performance is quite striking, especially taking into account the difference in guidance between Ryanair and Wizz.

Source: Company reports, GridPoint analysis

Of course, these three airlines are not the same size, so another interesting perspective is the profit per aircraft. Wizz’s aircraft (208 seats on average) are slightly bigger than Ryanair’s (189 seats) and easyJet’s (180 seats), but I think it is a pretty good way of normalising the profit figures for size, given that the usual denominators of revenue or capacity have not been particularly useful of late.

I’ve shown these figures on the next chart, and it shows that going into the crisis, Wizz was making quite a bit more money per aircraft than the other two. However, for all that Wizz likes to shout about what a huge opportunity the pandemic has been for the company, it has done a far worse job than Ryanair at containing losses. The company likes to position this as representing an investment for the future, as it grows aggressively and builds itself up for a promised payback in 2022/23. But if the guidance for the next two quarters proves to be accurate, it could finish the 2021/22 financial year as the worst performing of all three carriers, with a lot riding on whether the promised “jam tomorrow” actually materialises in 2022/23.

I’m assuming that easyJet improve at least as strongly as Ryanair over the next couple of quarters. It is the most exposed of the three to the UK market, which suffered some of the heaviest travel restrictions in the first half of 2021. Those have now been relaxed, so I think there’s a good chance that easyJet will bounce back strongly as this feeds through, despite the lack of guidance from the company. Their strong position in the ski market will help them during the winter months too.

Source: Company reports, GridPoint analysis

Trends in passenger recovery

Both Ryanair and Wizz provide monthly passenger number figures and we already have their figures for October. That confirms the continued upturn at Ryanair and less impressive numbers from Wizz. Unfortunately, we don’t get monthly updates from easyJet, so we don’t know how things are going there. They did say they expected to operate 70% of their 2019 capacity in the December quarter. That suggests that passenger numbers should reach at least 60% of 2019 levels. Still lagging the other two, but catching up as they start to bring back capacity.

Source: Company reports, GridPoint analysis

What about the network airline groups’ low-cost arms?

It is also worth a quick look at the performance of the low-cost subsidiaries of the big 3 network airline groups.

On the face of it, Lufthansa’s Eurowings was the best performer of the three, with an operating profit of €108m and a margin of 29%, around double that achieved by Ryanair. But if you dig around in the detailed numbers, it becomes clear that €67m of that profit was Lufthansa’s 50% share of the profits of Turkish low-cost airline SunExpress, a joint venture with Turkish Airlines. There was also an €18m reversal of earlier provisions, so I think the real profit figure for Eurowings itself was only €23m, a more modest 6.2% profit margin.

At the other end of the spectrum was IAG’s Vueling, which only managed to break even. Its main base Barcelona was something of an epicentre for the Delta wave in Spain during the quarter.

This leaves Transavia, AF-KLM’s low cost arm, as the king of the hill in Q3, with reported operating profits of €105m. That’s a 20% profit margin, 6 points higher even than Ryanair.

Verdict

Q3 was very much a transition quarter for the whole industry in Europe as travel restrictions were eased and demand began to bounce back. The speed of that recovery varied quite a bit by geography and the relative exposure of each airline by country made quite a difference to their performance.

I don’t know quite what to make of the fact that the most profitable airline in Q3 of this “group of six” low-cost airlines was Transavia. I don’t have any information to suggest that this result isn’t completely valid, although there are always questions that need asking about internal cost allocations when it comes to divisions of large companies. But until and unless I find any evidence to the contrary, I’m going to take the results at face value and congratulate the team at Transavia for a stellar performance in the circumstances.

As usual, it is hard to be anything other than impressed by Ryanair’s performance. At least for me, any questions about whether Ryanair or Wizz was the better bet amongst the “ultra-low-cost” airlines have been firmly answered in favour of Ryanair, at least for now.

The big question mark in my mind is easyJet. The pandemic has hit them harder than the others. Their high exposure to the UK market has been problematic, given the UK’s unhelpful policies on travel restrictions and onerous testing requirements. Now those have finally been relaxed, the next few months will be critical for the company. Will they be able to rebuild their relative market position and close the profitability gap as demand recovers?

Earlier this year, easyJet turned down an opportunistic takeover approach from Wizz. Relative profitability may now be shifting back in their favour, as their own performance starts to recover and Wizz begins to falter. If that trend becomes established, perhaps a deal could yet be done on terms more to their liking.

A combined easyJet / Wizz would certainly be better placed to stand up to the ongoing challenge from the all-conquering Ryanair.