City Insider - FT journalist David Stevenson on the travel industry

Travelport logo
In association with Travelport

Who would have guessed back in the dark days of 2008 and 2009 that the low-cost airlines would have become City superstars just five years later?

To be fair, most of us might have expected the likes of Ryanair to flourish in an austere new ‘normal’ but it’s actually been the Irish airline’s big British rivals – easyJet and Dart Groups’ Jet2Go brand – that have turned into the runaway investment success stories of the last 12 months.

The soaring share price of both these UK operators tells us that the big City institutions have absolutely bought into these airlines’ hybrid business model, which splices together traditional low-cost carrier DNA with a focus on either business travel or all-in package holidays.

And if both easyJet and Dart can make those hybrid models work, their share prices might go even higher. The investment numbers for Easyjet and Dart really are quite startling.

Over the last 12 months easyJet’s share price is up a staggering 95%, but the hands down winner has to be Dart Group which has seen a 137% share price increase over the same period – investors in both outfits such as Andy Brough at Schroders must be rubbing their hands with glee.

Shares in Ryanair, by comparison, are up a measly 33%, while stock in BA owner IAG is up a pallid 16% over the same period. Tui Travel is up 51% over the year and Thomas Cook 56%.

Yet even after these sensational numbers, both easyJet and Dart are comparatively lowly priced – easyJet trades at a multiple of between 12 and 14 times earnings based on either current or forward estimates for profits, whereas Dart Group comes in at just six times profits.

EasyJet probably deserves a premium rating if only because it’s a bigger airline with truly international brand reach. Its operating margins run at about 8.5% compared to 4% for Dart, although it’s worth noting that both companies produce a return on equity of about 14% per annum.

What’s behind the success of these operators?

Obviously both of these competitors to sector leader Ryanair have benefitted hugely from a move towards lower cost intra-European air travel, helped along by tight consumer spending and domestic austerity.

One could argue that they’ve simply been in the right place at the right time, while also managing to avoid getting run over by the Ryanair price juggernaut.

But that general sector expansion doesn’t explain why Ryanair has now slammed on the breaks, scaling back capacity growth (cancelling new plane orders and returning cash to share holders ) while easyJet continues to power ahead with both new aircraft and more staff.

Only last week, for instance, it announced that was creating 330 new jobs for pilots as part of a new career structure for cadets and first officers.

Scratch beneath the surface and we discover that both easyJet and are fast developing very distinctive and different business models that could make them both much, much bigger – turning them into deadly competitors to the likes of Tui Travel and Thomas Cook.

EasyJet, for instance, is essentially developing a hybrid airline model that started off as a low-cost carrier but is now beginning to borrow much of the operating ideas of traditional airlines.

Its winning strategy is to focus on flying from mainstream airports that everyone wants to fly from, with enough frequency to tempt back the business traveller.

That hub-based approach is now being moved on again, with a greater emphasis on business travellers (easyJet is even offering business lounges) and in-cabin based differentiation, i.e. paying for individual seats.

How long can it be before easyJet takes this traveller/product differentiation to the next stage and introduces what is essentially business class?

My money is on easyJet moving ever deeper into this hybrid airline model, borrowing ideas already pioneered by the likes of AirBaltic – this fast growing East European airline has turned Riga into a transit point for travellers from northern and Nordic Europe into Russia and the Middle East.

It’s all about coordinating connecting flights at the main hubs, optimising checks ins and cutting connection times. This is all done with the same cost structure of an easyJet budget carrier.

Intriguingly, we’ve also seen traditional hub and spoke operators like Turkish Airlines moving in the opposite direction, using their low-cost hubs to attack the low-cost carriers.

Combine these innovations in budget air travel with easyJet’s higher customer satisfaction ratings and you can begin to understand why many City critics reckon that Ryanair might now be facing strategic decline, with its business model still rooted firmly in a traditional and increasingly out dated low-cost carrier model based on airports that fewer and fewer travellers want to fly out from.

In my own view Dart Group’s is actually developing a more interesting and revolutionary approach.

Remember how Ryanair’s Michael O’Leary predicted that his airline would benefit from the demise of smaller regionally focused competitors?

Although he may end up getting his way with Flybe (in deep trouble, with a legion of very, very unhappy institutional investors), Dart seems to be proving O’Leary very wrong.’s recent very strong numbers shows that regional scheduled flights can make a profit, but what’s really powering this airline is its all-out assault on the package holiday market.

Word from the coal face is that Jet2holiday’s all-inclusive holiday packages are absolutely storming ahead.

In the company’s last statement it revealed that average holiday prices increased by 10% as more customers bought all-inclusive products featuring higher grade hotels.

Dart also noted that “travel agency distribution  is an important part of the overall sales mix, with circa 36% of sales being delivered through this channel via a range of national, regional and local agencies.”

Clearly Dart realises the importance of working with powerful retail high street partners.

In an example of a virtuous growth cycle, that growth in the holiday business is now helping to push the airline business forward again – in that recent statement Dart noted that “growth in airline capacity is focused both on increasing frequencies, at great departure times, to our popular leisure destinations and supporting the growth of Jet2holidays”.

The traditional charter airline model championed by Tui and Thomas Cook is, of course, far from broken but running a scheduled airline business with lots of frequent flights from airports that you know and love is a huge advantage for

All it needs to do now is build the resort support infrastructure to make the proposition absolutely compelling.