Ryanair and easyJet are gaining ground in the battle for Europe's skies.
Whether you love them or hate them, low-cost airlines, with their extra baggage charges and bun fights at the boarding gate, are here to stay.
Results from the aviation sector in recent days show that the low-cost leaders, Ryanair and easyJet, are rapidly gaining ground in the fierce battle over Europe’s skies as rising fuel prices, aviation taxes and the consumer downturn buffet the industry.
Ryanair’s Michael O’Leary may have been absent from the carrier’s third-quarter results presentation on Monday but his stand-in, deputy chief executive Michael Cawley, was full of the same colourful pomp as his boss, trumpeting the carrier’s “better” and “more efficient business model” as he unveiled a 21pc surge in pre-tax profits to €18.1m (£15.5m).
The self-styled “ultra low-cost carrier” carried 17.3m passengers in the final three months of 2012 and is confident of reaching 79m by the end of its financial year in March.
Ryanair’s robust quarterly results came just a few days after a similarly upbeat performance from easyJet, which sent its shares soaring last week to their highest level since flotation in 2000. The airline is considered a dead cert to enter the FTSE 100 (FTSE: ^FTSE - news) at the next quarterly reshuffle in March
Both easyJet and Ryanair have upgraded forecasts off the back of recent strong trading. That’s a stark contrast to the picture that will be painted by British Airways-owner International Airlines Group (IAG) on Thursday, when it will proceed with a sharp restructuring of its Spanish carrier Iberia with or without agreement from unions.
Both Ryanair and easyJet are masters of marketing and Mr O’Leary is no stranger to a bit of playful exaggeration here and there. But when it comes to growth, the City is taking both carriers seriously.
“Bar perhaps feeder traffic into long-haul networks operated by the legacy carriers, there’s nothing they [the low-cost airlines] can’t turn their hand to,” says Gerald Khoo, transport analyst at Espirito Santo.
Ryanair and easyJet are well established names in the UK and Ireland (OTC BB: IRLD - news) but Europe-wide their market share is still relatively small, Mr Khoo points out, offering plenty of opportunity.
According to research group OAG Aviation, their combined market share in Europe is currently 18.1pc. By contrast Europe's biggest airline, Lufthansa had a market share of 14.6pc during the winter season.
Analysts believe the continued march of the low-cost carriers will be driven by two key factors. First (Other OTC: FSTC - news) , passengers and businesses operating on tight budgets trading down from legacy carriers. EasyJet (Other OTC: ESYJY - news) , which last year rolled out allocated seating, ending the free-for-all on its flights, now carries 10m business passengers a year, up from 7.8m in 2008.
Ryanair’s new reserved seating service, introduced last summer, was one of the biggest factors behind a 20pc jump in so-called “ancillary revenues” during the last quarter, the company said.
“Any residual snobbishness disappears quite quickly when there is hard money involved,” says Mr Khoo.
The main tailwind, however, will be capacity reductions by legacy carriers and more peripheral airlines dropping out of the sky, as they fail to overcome soaring fuel prices and austerity in Europe. Ryanair points out that 12 airlines either went bust or announced swingeing job losses last year.
“These trends will create more growth opportunities for Ryanair to grow profitably to 120m passengers a year over the next decade,” the company said.
Donal O’Neill, airlines analyst at Goodbody, said the budget carriers, which keep a tight rein on costs and don’t have legacy issues such as large pension deficits, have been choosing their battles wisely.
“They have positioned themselves in the right places and put the right kind of frequencies on routes where they can take traffic from the legacy carriers,” he said.
The next major battlegrounds are expected to be in France, Germany, Italy and Spain, which are still largely dominated by flag airlines.
EasyJet has been beefing up its presence across the Channel to take on embattled Air France (Paris: FR0000031122 - news) on key routes such as Paris-Toulouse. Less than a quarter of French travellers currently fly low cost compared with almost one in two in the UK.
Ryanair, now the largest airline in Spain, is tipped to profit from imminent restructuring at Iberia.
Where will this leave the flag airlines?
They will be forced to focus their efforts on fortifying crucial domestic routes that feed passenger traffic into their more lucrative long-haul flights, says Mr Khoo of Espirito Santo.
“It’s all about defending what’s really important,” he says.