Ryanair Becoming More Of An easyJet

| About: easyJet Plc (ESYJY)

By Robert Poon

easyJet's (OTCQX:ESYJY) inaugural flight on 10 November 1995, from Luton to Glasgow with flight number EZY 121, marked the dawn of the era of no-frills flying, and the birth of a new British aviation icon. Two decades later, as the airline celebrates its 20th anniversary, it has grown to be United Kingdom's biggest carrier by market share.

Results for the 12 months ending 30 September 2015 showed that profit at easyJet grew to record levels for a fifth consecutive year, up 18% to £686 million. Net profit was £548 million, a year-on-year increase of 21.8%. Passengers increased 6% to 68.6 million, with a record load factor in August of 94.4%. Annual load factor increased by 0.9 percentage point to 91.5%.

Revenue per seat increased by 1.5% year on year whilst capacity grew by 5% to 75 million seats. These increases are driven in part by business fares, which grew 58% year on year.

These results are in light of disruption costs following French air traffic control (ATC) strikes in April and the impact of two fires at Rome-Fiumicino airport. Without these incidents, the results might have been rosier.

The Luton, England-based company has secured an additional 36 aircraft for delivery between 2018 and 2021. They comprise of 30 re-engined A320neos (new engine option) and six A320ceos (current engine options), all in the 186-seat configuration. easyJet is exercising the rights under an agreement signed with Airbus (OTCPK:EADSY) in 2013.

easyJet's total fleet as of 30 September 2015 stands at 241 aircraft, a net increase of 15 from 2014. The carrier operates an exclusively Airbus A320 family fleet. It is currently the second-largest operator of Airbus aircraft in the world. Between 2016 and 2021, it would undergo a major revamp, moving from a majority of 156-seat A319 composition to a fleet that is over 70% 186-seat A320s. This is expected to achieve a 13-14% cost reduction per seat, translating to over £110 million of savings.

Over the last year, easyJet added a net 60 routes to its network; to new bases such as Amsterdam, Hamburg, Naples and Oporto. Combining the usage of primary airports in large economic markets, alongside high frequencies and attractive flight timing, the company's business plan is to establish stronger leadership positions in markets that it serves. For example, 52% of its capacity is in airports where it has the number one position by share and 83% as one of the top two. It is the UK's largest short-haul carrier, with a 20% market share of the market. As of 2015, it has 134 UK-based aircraft.

"Our outlook for the longer term is positive. We expect demand in our markets to be sustained and for easyJet to continue to be a winner in its markets. We will see passenger growth of 7% a year, sustaining margins through rigorous cost control and the benefit of fleet up-gauging, resulting in positive profit momentum. We remain totally focused on our network advantage, digital leadership and offering our customers great low fares and service. We continue to invest in profitable growth, ensuring our digital advantage and giving our customer good value fares," easyJet Chief Executive Carolyn McCall said.

However, its title to the UK short-haul throne is being challenged by nemesis, Ryanair (NASDAQ:RYAAY).

"We're already the second-largest airline in the UK, running just a fraction behind easyJet," remarked Michael O'Leary, chief executive of Ryanair. "We expect to overtake easyJet in the next 12 months and become the UK's biggest airline."

Traditionally, the two airlines have occupied different segments of the market, however, there are signs that direct, head-to-head competition is on the rise.

According to the Centre of Aviation (CAPA), as of summer 2015, Europe's two leading low-cost carriers (LCC) overlap on 31 airport pairs. Although this direct competition makes up only a small percentage share of each airline's network, it is more significant to easyJet than it is to Ryanair.

The overlapping airport pairs account for around 4% of total seats at each carrier. However, whereas it makes up less than 3% of the total number of airport pairs in Ryanair's network, they constitute more than 5% on easyJet's side. It is also noted that Ryanair has more seat capacity on 25 out of these 31 routes.

Another interesting comparison for the two airlines is the city pair overlap. This measure further highlights the extent of competition between the two carriers. As of summer 2015, the two overlap on 85 city pairs. This overlap accounts for 13% and 22% of seat capacity at Ryanair and easyJet, respectively. Again, Ryanair has the upper hand, with more capacity on 51 of the 85 city pairs.

Ryanair is Europe's biggest short-haul airline by capacity. The company operates more than 1,800 daily flights from 76 bases, connecting 200 destinations in 31 countries. It operates an exclusively Boeing (NYSE:BA) 737-800 fleet, with over 300 aircraft in current use.

The year 2015 is a major landmark for Ryanair, marking its 13th anniversary for the Dublin-based company. In November 2015, the carrier announced that its half-year profits jumped 37% to €1.08 billion. This was on the back of a 13% increase in the number of passengers to 58 million and a load factor increase of 4 percentage points to 93%.

"We are pleased to report this strong set of H1 results. We have enjoyed a bumper summer due to a very rare confluence of favourable events including stronger sterling, adverse weather in northern Europe, reasonably flat industry capacity and further savings on our unhedged fuel, as millions of customers switched to Ryanair for our Always Getting Better (AGB) customer experience programme." commented O'Leary on the latest half-year results.

According to its first-half report, during winter 2015/16, the company would take delivery of 28 new Boeing 737-800 aircraft which will bring the fleet total to 340 by year end, with another 330 in the order pipeline, including 100 re-engined 737 MAX 200s on firm order configured with most seats having 28-inch pitches.

Full-year net profit guidance is forecasted to be towards the upper end of €1.175 to €1.225 billion. It has also raised its long-term traffic target from this year's 105 million to between 160 million and 180 million customers per annum by 2024.

Michael O'Leary is known for his colourful remarks and for his sometimes miserly attitude towards customers; having previously been quoted as wanting to consider charging passengers €1/£1 to access lavatories in flight. The airline has been known to quote extremely low base fares, but then applying pricey additional charges to "extras" such as luggage, airport check-in and seat selection. The latest AGB initiative has seen the company try to obtain higher customer satisfaction. Fees for some extras have been decreased, such as printing boarding passes which used to cost €70, or £70 in the UK, has now been adjusted to €45/£45.

"If I had known that being nicer to customers would have been so profitable, I would have been nicer to customers would have been so profitable, I would have been nicer many years before Kenny came on board," Michael O'Leary was quoted as saying. Kenny Jacobs being Ryanair's chief marketing officer.

"Ryanair is moving its business model upmarket, chasing the middle ground, which previously was the domain of easyJet," says Andrew Lobbenberg, a transport analyst at HSBC.

The battle of these two low-cost carriers looks set to continue. Whether one would emerge victorious, or whether both would thrive in the marketplace? All seems in place for an interesting battle.

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