By Bjorn Fehrm
Nov. 18 2015, ©. Leeham Co: Easyjet revealed record numbers yesterday with pretax profits now at 14.6% of a year turnover of £4,686m. The load-factors for their aircraft are at a record 91.5% on a 12 month basis, with an increase of 1.5% for the period. The return on employed capital has increased to a high 22.2% from 20.5%.
The LCC now transports 69m passenger per year and continues to increase its capacity and efficiency. Airbus yesterday announced that easyJet has signed a firm order for a further 36 A320 Family aircraft, taking its cumulative order for the type to 451. The agreement for six A320ceos and 30 A320neos makes easyJet one of the world’s biggest airline customers for the A320ceo Family with 321 ordered and also for the A320neo, with 130 on order.
Earlier in November Ryanair had announced their record results, further manifesting their investment grade rating. At the same time Europe’s largest airlines, Lufthansa and Air France-KLM, are engaged in difficult negotiations to reduce their personnel costs, a mission riddled with strikes and confrontation. The once reliable Lufthansa is no longer.
What is the reason for this divergence in the market?
The problem is that the base product, transportation of a passenger from A to B within Europe, is hard to differentiate. For a one-to-three hour flight, the difference in comfort of sitting behind or in front of a business class curtain is minimal. Worse still, the difference between flying with easyJet and Lufthansa in economy is even less (I know, I fly with both on a regular basis).
EasyJet has been smart enough not to configure their aircraft with bad seats or a too narrow pitch. I step off an easyJet two hour flight just as relaxed as a Lufthansa or Air France-KLM economy class flight (the only difference is the coffee and sandwich, easyJet serve an instant coffee and a heated frozen sandwich). EasyJet also flies to the same airports as the legacy carriers, contrary to Ryanair, who flies to cheaper remote airports. Ryanair is very successful with their approach. Their numbers speak their own language (net margin of 27% on turnover while transporting 150m passengers per year).
Ryanair and easyJet goes after slightly different customer types, with easyJet being more successful in attracting business travelers. This will now change, says Ryanair. They are implementing changes to be more attractive to the business public, like changeable tickets and seat allocations. For now, easyJet has the better product, a major difference being the airports they fly to and cabin interiors where they do not use plastic seats without seat pockets.
EasyJet has also been clever in improving their standard economy product for those who are prepared to pay a little extra. For paltry €15 you get the same boarding experience as if you traveled business class with a legacy carrier–you board before the rest of economy class. They also offer best seating options (you can reserve that extra legroom exit row seat), fast track security lanes on certain airports, no fee ticket changes etc.
EasyJet and Ryanair are now competing with each other to invent useful but cheap to implement perks to attract more business passenger. Both now have easy-to-change tickets (free for loyalty card travelers on easyJet from next year) and allocated seats. EasyJet is so far alone with priority boarding and fast lanes.
So what can the legacies do? In economy they will have to come close in price, their products are not well enough differentiated; good coffee is only worth so much. Against the Norwegian LCC, they even lack free in-flight Wi-Fi and the Norwegian coffee and muffin is good. Norwegian, which perhaps has the best LCC seats/cabins (Boeing Sky interior) and coffee, let alone the free Wi-Fi, has only its network coverage against it. It is focused to serve northern Europe.
On the legacies business class product, I feel there must be some change to the present comfort level. It is no longer acceptable to pay an expensive business class ticket for a blocked off middle seat with the same seats and seat pitch as in economy. One gets a free meal and drinks for the extra money but you get that for €20 in economy (if it’s not for free) or at the LCC as well.
On long haul it is easier. A true lie-flat with the premium service that is connected makes for a real difference when one has to kill 8-12 hours. For a one-to-two hours flight in Europe, there will have to be something new invented or the legacy business class will have a shrinking future.