Growth Expectations of Low Cost Carriers

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Low-cost carriers: growth expectations  
After a decade of rapid development, low-cost carriers in mature markets are now having to expand their horizons, both demographically and by geography, to keep their foot on the accelerator Financial results for low-cost carriers over the past 12 months show the sector underlining its continued profitability credentials. After coming out of the 2009 meltdown relatively unscathed compared with their battered network rivals, nearly all airlines improved their financial position as demand rose. Revenues across 36 carriers in this year's Airline Business low-cost carriers survey jumped 19% to $58.7 billion in 2010, while operating profits across nearly 30 of these airlines more than doubled to 4.2 billion last year. While a similar pick-up in fortunes has been seen among their network rivals, most of which enjoyed the unexpectedly quick return in premium traffic last year, a look at recent profitability levels of both types of carrier highlights the robustness of low-cost operators. Data from four years of the Airline Business low-cost carrier and world airline ranking surveys shows that while the 10 largest network carriers were highly profitable in 2006 and 2007, seven lost money in 2008 and eight were in the red in 2009 at an operating level. Contrast this with the top 10 low-cost carriers - only two lost money in 2009, three in 2008 and one apiece in 2007 and 2006. The graph opposite shows the top 10 low-cost carriers have remained consistently profitable, albeit it at lower levels than their 10 biggest network counterparts - which have thrived in the good times and haemorrhaged in the bad. "The [low-cost] business model has performed well through the recession, and that makes sense because business and leisure traveller are seeking value [during periods of recession]," says London-based RBS Aviation analyst Andrew Lobbenberg. While the sector has had its fair share of financial casualties over the years, impressive operating margins for many carriers testify to the robustness of the model. "Last year turned out not be a bad year, the issue is what happens now," notes Chris Tarry, principal of aviation consultancy CTAIRA. One red flag concerns fuel. "One of the challenges is they [low-cost carriers] have to operate with a very high break-even load factor. If fuel goes up, that lifts the breakeven load factor higher," he says. While a strong economic backdrop helped sustain higher fares during the 2008 fuel price surge, this time around the climate, especially in parts of Europe is far weaker. Tarry, pointing to a glut of fares sales on European short-haul, questions whether airlines will be able to secure the higher fares. DIFFERENT CHALLENGES

Low-cost carriers across the regions are operating in very different environments today. Those in the more mature markets of Europe and North America have an entirely different landscape to those in burgeoning Asia and Latin America. But both face challenges in sustaining their growth. For European and US carriers, raised on a diet of double-digit growth, operating in established markets provides a challenge in finding new routes. "In broad terms it has matured, but there is still room for growth [within Europe]," says John Strickland, former executive at UK budget carrier Buzz and director at JLS Consulting. "There are still markets that are underserved and overpriced. France is the biggest one that is still underserved. There remain significant opportunities there."  

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"We have a mature market," acknowledges Germanwings managing director Thomas Winkelmann. "It has grown very fast over the last 10 years and you are connecting every village to village in Europe. But we have had some artificial growth [as well], growth that was subsidised from governments, you create demand that is not there. And we still have a bunch of state-owned carriers." He believes state...
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