In association with Travelport
I explained in yesterday’s column how Tui Group and cruise line Carnival can use their globally diversified customer bases to play lots of different trends.
It is a similar story at airline giant International Airlines Group (IAG) which is, in effect, a holding company for the ultimate global airline brands’ portfolio.
IAG has just released some impressive numbers – its first quarter results revealed the group’s first-ever operating profit for the three months.
But dig deep into the statement and you see the performance very much depends on which market you focus on.
Passenger unit revenue or RASK [revenue per available seat kilometre] fell by 0.8% across the group in Q1 2015 with a Centre for Aviation (CAPA) note on the airline observing the biggest falls were in Europe (-4.1%) and Latin America (-3.6%).
In Europe, CAPA analysts noted: “Price competition remains intense as low cost carriers (LCCs) continue to increase their share.”
IAG boss Willie Walsh was quick to throw a few well-chosen brickbats at competitor Air France-KLM, saying: “Look at their performance in their first quarter. That is an airline that will struggle to compete with Iberia, with its cost base.”
By contrast, IAG’s North American operations produced some excellent numbers with RASK up 5%.
All of which brings us to the cloudy outlook for some operators, not least the low cost airlines.
I’ve long been worried that the declining oil price would result in a classic problem – price wars, extra capacity and most of the gains being given back to consumer via low prices.
The package travel industry has spent decades digging itself out of such capacity-induced, Groundhog Day moments where a strong upswing in demand results in price wars and corporate carnage.
The low cost carriers don’t seem to have learnt this lesson, although given Ryanair’s predilection for cutting prices I suppose most in the industry don’t really have a choice.
EasyJet’s numbers in half-year results last week confirmed my worst fears, although on paper the numbers were superb.
The airline moved into the black in the first half of the year and reported forward bookings for the second half in line with last year.
Sales in the six months to March rose 3.8% to £1.77 billion, with pre-tax profits coming in at £7 million compared with a loss of £53 million a year earlier.
The group has expanded the number of bases from which it operates to 26. Furthermore, the company grew the available capacity on its aircraft as well as increasing the average number of passengers on each flight.
Total revenue per seat rose by 2.6% year on year on a constant-currency basis and by 0.2% per seat on a reported basis to £54.91 per booking.
So far so good, yet investors clearly didn’t like what they saw, marking down the shares aggressively on the day of the results.
The reason was a lowering of expectations for the second half and concern about industry capacity.
The second half has not started well for easyJet following disruption caused by the French air traffic controllers’ strike in April and higher regulatory charges in Germany and Italy.
In its statement on the outlook, easyJet forecast a fall in second-half revenue per seat at constant currency, in contrast with the increase achieved in the first half.
The key words, picked up by analysts at CAPA, were as follows: “Inefficient capacity is likely to stay in the market longer . . . [moving into the summer season] passengers are benefitting as fares fall to reflect a more competitive operating environment and lower fuel costs.”
EasyJet is playing a massive capacity-expansion game itself. The carrier’s fleet grew by 10 aircraft to 230 at the end of March and this growth will continue as more A320s are delivered to replace the A319 fleet.
The CAPA Fleet Database shows that, as of May 12 this year, the airline had 56 A320-200 and 100 A320-200 neo [new engine option] aircraft on order.
My sense is that investors are beginning to wake up to the capacity challenge and its likely impact on yields and margins.
Consumers will expect constantly lower prices and thus hunt down the very cheapest option rather than accept the fact that prices might have to rise.
This is terrible news for the smaller and/or weaker operators in the space.
This is a community-moderated forum.
All post are the individual views of the respective commenter and are not the expressed views of Travel Weekly.
By posting your comments you agree to accept our Terms & Conditions.