Steve Endacott asks whether the industry will see a mass extinction
Millions of years ago the earth was hit by a meteorite that instantly changed the environment and lead to the death of the Dinosaurs.
The coronavirus outbreak could have a similar impact in the travel industry over the next 18 months, with major brands becoming extinct. Could easyJet be one of these?
I have written a number of blog posts in the last year explaining how ‘the big are getting bigger’ and the rest struggling to survive.
The bigger you are, the quicker you fail
Economies of scale in a commodity market place mean the biggest companies have the lowest operating costs and can sell flights at lower prices than competitors, creating a virtuous circle where they grow while others like Monarch, Flybe and Air Berlin are forced out of the market.
The biggest winners over the last 10 years have clearly been easyJet and Ryanair.
However, in a situation where the industry is placed in instant lockdown, the ‘bigger you are the quicker you fall’.
Last year’s easyJet accounts showed the airline having average revenue per passenger of £157 and average costs of £152, yielding a net profit of £5 per passenger.
Multiplied by 96 million, that creates a very healthy profit. But when revenues stop and you multiply £152 by millions of un-flown seats, you can see how losses escalate dramatically.
I fully expect all European governments to step in to assist their major domestic airlines, with all sorts of financial assistance to try to prevent them from collapse, and I would be amazed if a highly profitable and efficient airline like easyJet was allowed to go down.
However, this assistance will not come free of charge and, depending on the length of the impact, the resulting debt mountain could change the airline landscape.
Historically, low-cost carriers have been in continuous expansion mode, using the benefit of lower-cost bases, preferential lease rates based on massive orders of new aircraft, and operating efficiencies.
Cost efficiencies go into reverse
When expansion stops dead and aircraft are left on the ground, these cost efficiencies go into reverse, making the larger airlines the most vulnerable.
Combine this with high interest payments and you could easily see how a new airline start-up could have a lower cost base than easyJet and do to the airline what it did to British Airways.
Obviously, this would not occur until boom times return, but don’t rule it out.
Low-cost carriers are currently encouraging customers not to claim refunds for cancelled flights, but to defer bookings to next winter or summer 2021.
I am fully supportive of this perfectly reasonable and balanced response to the current crisis and believe this will create an ‘ultra early’ market for summer 2021 sales as customers simply shift their holidays back a year to gain certainty and something to look forward to.
Ultra late market for 2020?
This suits the low-cost carrier yield model and could give them the initial load factor to make summer 21 a great year.
I also think there will be an ‘ultra late’ market for summer 2020, triggered by the coronavirus dam breaking.
This is likely to occur when cases are peaking in a country and there is no longer any point keeping borders shut.
Wealthier customers who have had the virus will be seriously fed up with isolation by then and will flock to go on holiday at short notice to destinations that are open.
An ‘ultra late’ market is completely at odds with the low-cost carriers yield models, where they start prices low, months ahead of departure and increase them close to departure.
This will not be possible when kick-starting routes virtually from scratch. Airlines will be forced to adopt old-style tour operating practices, filling seats for whatever price they can and discounting at the last minute to fill empty seats.
EasyJet will be cautious about entering into this mad scramble of a market.
It will therefore take them longer than expected to re-open their pre-coronavirus flight network. They will try to allow demand to exceed supply before adding further capacity, assuming they can afford to leave aircraft parked on the ground.
Financial support for a UK plc which operates easyJet UK, Europe and Switzerland is not 100% cut and dried. Why would the UK government want to support aircraft registered in other countries?
However, I still back easyJet to get support faster from the UK government than Ryanair from the Republic of Ireland. Where an airline is domiciled could have a bigger impact than previously thought.
To answer my own question, ‘Could easyJet really go bust?’ – the answer has to be yes. But given its excellent management, customer service ethos and great track record, it should ride out the headwinds it is facing, although it may suffer substantial damage along the way.
On balance, I’m more likely to be a buyer of shares than a seller in the next six months.
This is a community-moderated forum.
All post are the individual views of the respective commenter and are not the expressed views of Travel Weekly.
By posting your comments you agree to accept our Terms & Conditions.