Mixed fortunes

posted on 20th November 2019
Mixed fortunes

Two of Europe’s largest low-cost European airlines face very different outlooks for 2020.

Ryanair looks likely to overtake Lufthansa this year as Europe’s biggest airline by passenger numbers. Meanwhile, Norwegian, Europe’s third largest low-cost airline, has been struggling under the weight of enormous debt.

“They are very different businesses. Ryanair is very established as a short-haul carrier and generates a lot of cash. It flew more than 85 million people in the first half of the year and has built a successful model,” said Chris Tarry, founder of the aviation consultancy CTAIRA. “Meanwhile, Norwegian has a large debt burden, but I have become more optimistic recently about its prospects. I think it has turned a corner by developing a more measured business model.”

Even the bosses of the low-cost behemoth that is Ryanair have admitted that they expect a slowdown in 2020/21. In July, the company cut its growth ambitions for next summer from 7% to 3%.

In October, Ryanair said it expected to carry 157 million passengers in 2020/21, which would be a rise of 2.4%. The downgrades are partly due to delays in the arrival of 210 Boeing 737 Max aircraft as the airframer seeks regulatory clearance to fly the planes again following updates to flight control software. Boeing hopes for a green light from the US Federal Aviation Administration by the end of this year.

Ryanair, however, remains a dynamic and relatively stable presence in European aviation. It will launch a new Malta-based subsidiary, Malta Air, that will fly to more than 60 destinations across Europe and North Africa next year. It won’t be Ryanair’s first subsidiary. Since March 2018, it has run the Austria-based airline Lauda, and also owns Poland-based Buzz, which begins operations this autumn with a fleet of 25 aircraft. It has also established a UK subsidiary – Ryanair UK – as an insurance policy against a hard Brexit.

Last year, Lufthansa was Europe’s largest airline with 142.3 million passengers, but Ryanair was closing in fast on 139.2 million passengers. It has a fleet of 439 aircraft and orders for a further 260.

On the face of it, the prospects of Norwegian for 2021 seem much bleaker. Ryanair Group CEO Michael O’Leary certainly thinks so.

In early October he said it was “bound to go bust sooner or later” and was “doomed”. O’Leary’s argument was that Norwegian was saddled with too much debt to survive.

He noted that Norwegian had resorted to selling five aircraft to raise US$50 million to keep the business afloat. This summer the Oslo-based carrier also had to ask bondholders for a two-year extension in repaying two bonds, totalling $380 million, which were about to reach maturity.

But Tarry disagrees with O’Leary’s dismal prognosis and sees brighter prospects for Norwegian in 2020/21. This is partly down to his admiration for the business approach of acting CEO Geir Karlsen, who took control this summer. Karlsen had already been working on the company’s finances for a year.

“Karlsen’s plan is to move from growth at any cost to a more measured business model. A slower rate of growth will be more stable and not expose the company to the additional risks that come with new routes,” Tarry says.

Tarry also believes Norwegian’s long-haul model is working well despite the “heated debate” in the industry about its suitability for low cost airlines. The airline exploded in popularity when it offered flights between US cities on the east coast and European airports.

Beginning its low-cost model in 2002, it became one of the fastest-growing airlines ever. But all the new planes demanded additional running costs and many of its 787s have had to be grounded for engine repairs. Further financial stresses came when its 18 737 Max aircraft had to be taken out of service in March.

Despite the setbacks, Norwegian remains confident that the long-haul model is working. The airline will be increasing the number of services it operates to the US next year, including introducing daily flights to San Francisco in the summer of 2020. Other routes getting beefed up include London Gatwick to Austin and to Denver, both of which will get four extra flights. Meanwhile, its Gatwick to Tampa service will have three more flights.

Matthew Wood, SVP commercial at Norwegian, said the expansion was in line with the company’s strategy of concentrating on key routes across where there was strong demand.

“The approach is similar to what Virgin [Atlantic] achieved on routes in competition with British Airways 30 years ago. It’s about pulling demand away from the established carriers and the CAA [Civil Aviation Authority] data suggests it’s working for Norwegian,” said Tarry.

Although he has some faith in the 2020/21 performance of both Norwegian and Ryanair, Tarry says the market will continue to remain volatile, highly competitive and unpredictable. Since 2017, the European market has seen a number of closures, including Aigle Azur and XL Airways in France, Icelandic carrier Wow Air, Germany’s Germania and Air Berlin, the UK’s Flybmi and Monarch, Denmark’s Primera Air and Lithuania’s Small Planet Airlines.

To some extent, there has been market consolidation. In its 2019 report Tackling Headwinds, KPMG suggested that the bankruptcies of Alitalia, Air Berlin and Monarch within a short space of time in 2017, had only had a “muted” impact. The aircraft were taken up by other carriers, mainly in Europe. But Tarry still expects to see more airline failures as the 2015-16 period of peak profits for the low-costs has long passed and the market is struggling with over-capacity.

Making firm predictions for the 2020/21 low-cost market in such a volatile time for the world economy is difficult, Tarry says. But there are four key factors to consider – GDP, fuel, currency and capacity.

The current position on economic prospects, he says, was well summed up by the OECD’s chief economist Laurence Boone in September when she noted that: “Growth was taking a dangerous downturn”.

The OECD report highlighted that in mid-2018, GDP growth for 2019 was expected to be some 4 per cent but on the basis of their own latest forecasts the expected outturn for 2019 had fallen to 2.9 per cent. International trade, which grew by some 4 per cent in 2018, was also expected to decline in 2019.

Meanwhile, the US economy was forecast to grow at 2 per cent compared to the 3 per cent in 2018 and China’s growth was forecast to slow to 5.7 per cent from 6.6 per cent, with the euro area predicted to grow at 1 per cent compared to 1.9 per cent in 2018. Tarry said: “The risk is very much on the downside which is likely to result in further reductions in expectations as we move into and through 2020.”

Meanwhile, the volatility in the oil price remains another unpredictable factor. A year ago, Brent oil was at some $80 a barrel and is now closer to $60, but the price has fluctuated widely. There are also challenges in getting enough capacity to maintain all routes, not least because of the delays in 737 Max deliveries.

“There should be no doubt that the underlying operating environment has again become more challenging. Against the current background perhaps the only certainty is that uncertainty will increase. It’s time to hold on for a bumpy ride,” Tarry said.