Every columnist knows to never let a good anecdote go to waste, so here’s one that helps explain why Europe’s airlines face “a very difficult winter” – as Michael O’Leary, the boss of Ryanair Holdings Plc, put it this morning.
I’m taking a week’s holiday in early November and on Sunday finally got round to booking some flights for my family from Berlin to Majorca. Even at this late juncture, I was spoiled for choice. EasyJet, Ryanair and Lufthansa’s Eurowings were all offering ridiculously low fares. I ended up paying EasyJet about 43 euros ($49.50) for a return adult ticket, whereas my child – who’s not yet two and will have to sit on my lap – has to pay 62 euros.
There’s a simple enough explanation for this strange situation. EasyJet charges a flat rate of 25 British pounds (31 euros in Germany) for one-way infant fares, which covers the cost of carrying a stroller and car seat, plus airport charges. Still, when baby fares cost more than those for parents, it says nothing good about the outlook for Europe’s airlines.
It wasn’t supposed to be like this. Investors hoped that the collapse of airlines such as Air Berlin Plc and Monarch Airlines would remove capacity from Europe’s crowded aviation market and support higher fares. It didn’t happen quite like that.
Carriers rushed to occupy the vacant takeoff slots in places like Vienna and Berlin. Berenberg analysts expect a 6 percent increase in European aviation capacity in 2018 and more than 9 percent in 2019, despite the airline closedowns. That’s naturally putting downward pressure on fares, which is very unhelpful for profit margins at a time when fuel costs are rising.
On Monday, Ryanair confirmed that fares fell 3 percent in the April to September period and it expects at least another 2 percent reduction during the coming winter months because of “excess capacity in Europe.”
The good news from Ryanair’s perspective, is that even though fares are falling, passengers are spending more on things like reserved seating and priority boarding. These so-called ancillary revenues climbed 27 percent year-on-year in the first half. EasyJet’s doing a decent job at selling ancillaries too, as I explained here.
O’Leary thinks there are more airline failures to come. Norwegian Air Shuttle ASA is high on his not-long-for-this world list. It’s conceivable yet another round of consolidation would benefit Ryanair because in spite of its decision to recognize trade unions, the Irish company’s operating costs remain lower than peers.
Still, if history and the airlines’ slumping share prices are anything to go by, the real winners of Europe’s furious battle to put bottoms on seats will be passengers, not airline owners. Even if they have to pay a little extra for their kids.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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