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Most profitable airlines are low-cost carriers…

Ryanair & Easyjet

A study by WSJ just showed how Allegiant air is US most profitable carrier.  With a pre-tax profit of 18.5% it leaves all other airlines far behind.  Allegiant air probably doesn’t ring a bell for most of us.  It’s a rather small ultra-low-profit carrier flying 64 jets.  Second in ranking is Spirit airlines.  Another ultra-low-cost carrier.  Far behind them follow the airlines with a less low-cost like business model like Southwest, jetBlue and all others.

Profits US airlines 2013Q1If we look at the figures in Europe we see a similar trend.  Number 1 in profitability is RyanAir.  Second spot goes to easyJet.  This chart makes it painfully clear.  Despite so called legacy carriers are generating a lot more revenue they don’t manage to turn them into profits.  Low cost carriers have much better operational models.

Europe airline profitability 2012

Europe airline profitability 2012

Operating profits European airlines 2012

Does this mean the end of the legacy carriers?  Not so fast…  there are some limitations to the business plans the low-cost carriers (LCC) use today.

– Legacy carriers are most often in competition on the routes they serve.  LCC’s pick out routes without competition or with competion with a legacy carrier.  (hardly ever will you find a route served by multiple LCC’s.

Ryanair & Easyjet

Ryanair & Easyjet

(saturation of the markt is forcing them to consider these routes)
– LCC’s avoid paying fees or overhead costs by operating on their own.  They don’t offer connections or partnerships with other airlines and their tickets cannot be booked with travel agencies.  This sets boundaries to their market, one cannot travel everywhere with just a single flight.

– LCC’s will avoid flights that wouldn’t allow them to have the plane and crew back in their hometown at the end of the day.  Legacy carriers operate lot’s of flights where crew stays overnight in a hotel.

So even if the business model of the LCC’s seems to be superior to this of the legacy carriers this business model is not expandable to the entire sector.  There is room for both in the market and each model is superior in it’s specific domain.

Both business are now moving towards each other.  Former low-cost carriers are changing their business models more towards this of the legacy carriers. (eg. is Southwest that transfers luggage already for some time now)  As they move towards the legacy carriers we see new ultra-low cost carriers enter the market.  (eg. Allegiant)

We see legacy carriers adopt the low-cost model on those routes of their network where they can.  Iberia introduced Iberia Express.  Lufthansa is gradually shifting routes to their low cost subsidiary Germanwings.  Legacy carriers take a cautious approach with their new subsidiaries and will not implement all the limitations you see at the Ryanair’s of this world  (eg. Germanwings flights can be booked at travel agencies) but expect more fees and less flexibility.

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