Airline Weekly - February 5, 2007
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Airline Weekly - February 5, 2007

In Europe and Beyond: Continent’s shorthaul airlines well positioned to grow

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In Europe and Beyond: Continent’s shorthaul airlines well positioned to grow

When Ryanair discusses its latest financial figures today, it will surely reiterate its intention to double in size by 2012. It will, after all, increase the size of its fleet by nearly 120 new planes between now and then. Its rival easyJet, meanwhile, has 104 A319s on order, while Air Berlin’s order book contains 85 new B737-800s. And smaller European shorthaul carriers like Air One, Aegean, Clickair, Vueling, Air Europa, Germanwings, TUIfly and WizzAir are also receiving new planes.

Can Europe’s shorthaul markets support so much growth?

Fortunately, there are many reasons to think they can. For starters, many of these airlines—led by Ryanair—are operating with far lower costs than their legacy peers, which dominated most shorthaul markets before deregulation in 1997. Dramatically lower costs mean dramatically lower fares, which are stimulating traffic much faster than Europe’s relatively slow economic growth would predict. Europe’s LCCs, in other words, have built business models that enable them to charge extremely low average fares, or sometimes nothing at all.

Moreover, their business models don’t depend on connecting traffic—many don’t even sell connecting itineraries—but rather on local demand between individual city pairs. Naturally, at extremely low prices, the number of city-pairs that can support nonstop air service, even with 150-to-180-seat narrowbodies, is large. Outsourcing ground staff, a common practice in Europe, also adds to the feasibility of adding new city-pairs by enabling carriers to economically operate just one or two flights a day from a given airport. No economies of scale, with respect to airport staff, are required.

Leisure markets, of which Europe has a seemingly endless supply, are also easier to stimulate with low prices than business markets, especially given the long holiday periods offered by many of the continent’s employers. When prices dip, traffic almost automatically jumps. Climate and geography also make it easy for the continent’s shorthaul carriers to grow. Northern Europe tends to be wet, cold or both, while southern Europe tends to be sunny, warm and dry. Even better, the distance between most northern and southern cities is short, requiring just a one or two hour flight on which costly amenities and comfort matter little. This, too, enables carriers to keep costs—and thus prices—low.

It’s no wonder, then, why carriers like... (387 of 1549 words)

Also Inside this Issue:

Last week was notable for what didn’t happen. British Airways flight attendants didn’t follow through on a threatened strike and Delta’s creditors didn’t support US Airways in its attempt to take control of the company. Air France/KLM, moreover, didn’t submit a bid for Alitalia.

On the earnings front, British Airways did post a respectable quarterly profit, as did Brazilian LCC Gol. But both encountered operational difficulties that caused profits to be lower than they otherwise would have been. In booming Northeast Asia, Japan’s All Nippon and South Korea’s Asiana both announced strong profits.

US Airways may have lost the Delta fight, but it’s certainly not losing money. Its fourth quarter and full-year 2006 profit margins were—if not spectacular—among the U.S. industry’s best. jetBlue produced even better margins in the fourth quarter but lost money for the full year. It also expects to lose money again in the current quarter before rebounding.

It could be a few more weeks at least before knowing the outcome of AirTran’s Midwest bid and the winning bidder for Alitalia. Also unfolding is news about Virgin America’s battle to win flying rights, ExpressJet’s new startup carrier and LAN’s interest in the reborn Varig.

This week: more earnings announcements, starting with Ryanair.

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