Outlook for European airline revenue in Q3
What expectations should we have for European airline revenue in Q3?
I’ve been tracking the three big network airline groups (IAG, Lufthansa Group and Air France - KLM) and the three big low cost airlines (Ryanair, easyJet and Wizz) as they try to deal with and recover from the pandemic hit.
The results for Q2 (April - June) covered the “lock-down” period, with minimal capacity operated by any of these carriers. The priority for that phase was all about minimising costs, preserving cash and finding new sources of liquidity. In case you missed it, you can read about how they all did in my earlier post.
The next quarter will be the first one since the start of the crisis with a meaningful amount of capacity being operated. How quickly are carriers building back their operations and how well are they doing in finding passengers to fill their planes?
Q3 capacity plans
The first thing to consider is how much capacity each company has brought back for the critical July - September quarter. In normal times, this would be the biggest revenue quarter of the year, encompassing as it does the key peak summer travel season.
In the chart below, I’ve shown expected Q3 capacity, expressed as a percentage of the same period in 2019. I’ve based these estimates on a mixture of published plans, guidance and announcements.
You can see that there is not so much difference between the low cost carriers and the network players when it comes to short-haul capacity, but long-haul is lagging behind as you would expect.
Wizz and Air France-KLM stand out from their peers as adopting a more aggressive approach to bringing back capacity.
Short-haul capacity ramp ups within the quarter
If you drill down and look at the monthly profile within the quarter, you can see that July capacity is lower than the figures for the quarter as a whole. The figures in the chart below are straight from OAG published capacity data, so the actual outturn will be lower due to close in cancellations.
For example, Wizz reported actual capacity versus 2019 in July of 75%, compared to 88% shown here and have indicated they will fly at 80% of 2019 levels in August and September. easyJet operated 20% of their capacity in July, versus the 30% that published capacity would have suggested.
Despite these caveats, I think the data gives a useful perspective on how the carriers compare and the trends within the quarter.
Published long-haul plans look unlikely to materialise
Based on published schedules (see chart below), the recovery in long-haul capacity should be following a similar profile as short-haul, but with a lag of a couple of months. However, with continued bad news on the pandemic and travel restrictions still in place between Europe and the USA, I expect that the actual capacity will be some way below these levels. The uptick in September looks particularly unlikely to materialise to me.
Air France - KLM’s plans stand out as especially aggressive (or maybe just implausible) compared to the much more closely aligned IAG and Lufthansa.
Adding back capacity is one thing, but bringing in passengers and revenue to match is quite another. What can we say at this point about the outlook for passenger volumes and load factors?
Network carrier load factors are not going to be great
In a recent post “Tracking the cover in European airline demand”, I looked at the passenger volumes being reported by the main European airports for July, with some limited data also available for early August.
For IAG, this data shows that short-haul traffic in July was only 20% of 2019 at Madrid and lower than that at Heathrow. Overall short-haul passenger volumes for Spain were slightly better, at 23% of last year, with domestic traffic the bright spot at 38%.
It was a similar picture at Frankfurt, although short-haul appeared a little stronger. Paris showed the best overall volume picture for short-haul in July, with traffic at 29% of 2019 levels, benefiting from the relative strength of the large French domestic market. Amsterdam was a bit worse at 23%.
Those volume figures are quite a bit lower than the published capacity levels I outlined earlier for July, showing that load factors are going to be well down. ADP published an average load factor for the two Paris airports of 66% in July, well down on the 85%+ load factors that would be normal in the summer. And with carriers ramping up capacity in August and September, that is likely to come under further pressure.
Long-haul passenger volumes at Paris (14% of 2019) and Amsterdam (11%) seem particularly out of line with capacity being operated. If Air France - KLM are really operating 40% of last year’s capacity, load factors are going to be terrible unless they see a lot of growth in August and September. Alternatively, they may be cutting capacity back a lot through close to departure cancellations. Perhaps the decision to operate so much capacity has been purely driven by cargo considerations, and that may make sense given the currently inflated cargo yields.
Low cost carrier seat factors will mostly be better, but still bad for peak summer
We have some direct evidence for Q3 seat factors at the low-cost airlines, as they have reported seat factor and passenger numbers for July.
easyJet reported the best seat factor for the month at 84%, reflecting their more cautious approach to bringing back capacity, with seats offered only 21% of last year’s levels. With capacity in August more than double that offered in July, it will be interesting to see how well that seat factor can be sustained for the quarter as a whole.
Ryanair was in second place for load factor, achieving 72% on capacity which was at 40% of normal levels. That is much closer to their planned capacity for the quarter as a whole, so probably more indicative of what might be achieved in Q3.
Wizz were the most aggressive on capacity but also the worst for seat factor, delivering 60.5% in July. They operated 74% of last year’s capacity, but passenger numbers were still down by 53%. Although they did add more capacity in August, they have signalled that they will be pulling back in the face of weakening demand.
What about yields?
The final piece in the passenger revenue jigsaw will be yields. I don’t have too much to go on but I expect that the network carriers at least will make up some of what they have lost in load factor in higher yields, at least relative to the low-cost carriers who seem to have chased volume to a greater extent.
The on/off nature of travel restrictions will have both dampened demand and also created lots of localised price spikes, as panicked customers raced to get home before quarantine deadlines. I’m sure we will see quite a range of different yield performance when carriers report their Q3 figures, with both increases and decreases versus last year equally plausible given the number of moving parts.
The bottom line
Overall, Q3 revenue will be significantly higher than the almost non-existent levels recorded in Q2, but will still be a fraction of 2019 levels. As was the case last quarter, how well carriers manage to minimise their costs will be critical for the level of damage done in terms of further losses and cash burn.
Carriers will need to hang on to all the cash they can if they are to get through the winter period. Never an easy season for airlines, even in normal times.