Budget airline profits stalled

Posted By Darren Winters on Mar 6, 2019

Budget airline profits stalled

Budget airline profits stalled in 2018 despite the so-called “good times” of booming traffic and access to an array of plentiful cheap credit.

Fierce competition triggered by a number of upstarts entering the market has been cited as the main reason why budget airline profits stalled in 2018

Budget airline profits stalled in 2018, particularly for Ryanair dubbed the “worst short-haul airline” last year.

Ryanair, the second largest low-cost airline with 109.7 million passengers (2017) lowered its 2018 profit guidance from a range between €1.1 billion and €1.2 billion to a range of €1.0 billion to €1.1 billion

Ryanair CEO Michael O’Leary referred to the lower profit guidance as “a disappointment.”

So Ryanair managed to make approximately €1 billion in profits (not bad) despite tighter margins from fierce competition.

Ryanair’s €1 billion or so in profits bagged in 2018 would make many CEO’s green so why then is Ryanair CEO Michael O’Leary disappointed?

Ryanair CEO could be softening investors to the idea of the no pain no gain price war strategy.

Ryanair Budget airline profits stalled in 2018 could be the result of adopting a price war strategy to increase revenue in the short term or as a longer-term strategy to gain market share

Aggressive pricing could already be denting the profits of a string of budget airlines.

Budget airline profits stalled last year what’s more some of the operators are not worried about tighter margins which are likely to prevail this year

Budget airline profits stalled

In this competitive business environment Budget, airlines could be more focused on battling for market share (bums on seats) and willing to cut costs at the expense of short term profits.

The low-cost carrier business model for turning a loss-making enterprise into a profitable business could now be about driving rivals low-cost airlines to the wall through aggressive pricing. Those left standing, or better-said flying, end up with a larger market share and dominating the budget airline low-cost market.

An industry in transition could be another reason why budget airline profits stalled in 2018

The low-cost airline business could be maturing from near perfect competition with many operators offering a similar or identical service. Put another way near perfect competition means that the demand for seats is elastic. In a perfect or near-perfect competitive environment competitors will often if they can’t figure out how to differentiate their product/service engage in a price war even if it means operating at a loss.

Cutthroat pricing could be a reason why budget airline profits stalled last year

Budget airlines could be using predatory pricing and heavy promotion to eliminate or undermine their rivals and if so the marketing strategy could be working.

Ryanair saw passengers throughout 2018 grow by 9% to 142 million. Moreover, “strong ancillary sales,” meaning sales of additional services such as premium seats with more legroom and onboard catering contributed to passenger traffic.

There is room for improvement for UK’s second largest airline, Ryanair. The Irish budget carrier received low marks for seat comfort, food and drink, boarding and its cabin environment. Which survey of airline passengers ranked Ryanair at the bottom of 19 carriers flying from the UK. “Thousands of respondents,” said they would never fly the airline again, according to the Which survey.

Of those surveyed who chose an airline that they would never fly in the future, 70% chose Ryanair.

The best performers were Guernsey-based Aurigny Air Service, Swiss Airlines, Jet2, Norwegian and Dutch carrier KLM. Easyjet and British Airways came in at 11th and 15th, respectively, in the survey.

Short-haul overcapacity could be another reason why budget airline profits stalled last year

Ryanair CEO Michael O’Leary has said on numerous occasions that Europe is experiencing a “short-haul overcapacity” and Ryanair has to deal with literally dozens of “loss-making competitors”.

Indeed, emergency monetary policy, which entails an unprecedented period of ultra-low interest rates and massive amounts of quantitative easing QE has not only fueled the everything bubble , it has littered the landscape with zombie companies. These companies don’t have a viable business model, they exist and expand on the life support of artificially cheap credit courtesy of the central bank’s monetary easing policy

There could be a central bank sponsored overcapacity across a wide range of industries which include manufacturing, auto, and hospitality.

So budget airline profits stalled last year and could continue doing so going forward with a few“loss-making” already starting to feel the pinch. Tighter financial conditions, a price war means there is less stress tolerance for Budget airlines that make financial mistakes with excessively ambitious expansion plans.

Germania, a Berlin-based airline formally known as SAT (Special Air Transport), announced on 8 January 2019 that it may have to liquidate “short-term” unless a buyer is found. Germania has accumulated heavy losses for every operating year starting in 2013 and is short on liquidity.

Germania used to be an unexciting but profitable airline before its owners over expanded.

Germania’s expansion strategy brought higher revenues but it came at a huge cost. Put simply, a profitable airline turned into a loss-making one. Losses for Germania have ranged from €7 million and €26 million for every year since 2013.

Budget airline profits stalled last year is a wake-up call for investors

Overcapacity in short-haul flights in Europe, cut-throat pricing, tighter credit conditions, and a slowing economy could spell survival of the fittest. Tomorrow’s budget airline winners will today be profitable, least leveraged and have their credit lines intact.

A Budget airline shakeup could be in the wind with eventual oligopolists emerging, a few sellers budget airline operators with an undue influence on setting the price.

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