3 Financial Analysis: Operational Performance of easyJet and its Peers
3.4 Operational Drivers
Identifying the key operational drivers and how they impact the profitability is an important part of the financial analysis. In the airline industry, such drivers include: (i) number of passengers p.a., (ii) available seat kilometers (ASK), (iii) load factor, (iv) revenue passenger kilometers (RPK), (v) number of aircraft operated, (vi) ASK per aircraft, (vi) sectors and routes flown, (vii) metric tons (of fuel) per ASK, and (viii) staff per aircraft.
3.4.1 Passengers p.a.
The number of passengers is the most obvious key driver of revenues, as it reflects the ability to attract travelers. However, passengers do not directly translate into profits, as several other factors influence the performance (Feng & Wang, 2000).
All peers could increase their passenger numbers during the review period by similar rates, however, starting from different base levels. As a result, market shares remain by and large stable. In 2016 Ryanair grows stronger relative to the other peers, it remains to be seen, whether this is a one off or the beginning of a shift.
3.4.2 Available Seat Kilometers (ASK)
Available seat kilometers show the total capacity of an airline, They are calculated by multiplying the number of seats available for sale in a specific flight (excluding seats for staff or seats that are not for sale due to regulatory or technical reasons, if any) with the number of kilometers flown during that particular flight (Feng
& Wang, 2000).
𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟𝑠 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆𝑒𝑎𝑡𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 ∗ 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟𝑠 𝐹𝑙𝑜𝑤𝑛
Equation 3: Available Seat Kilometers
Figure 10: Passenger Development (m)
38 easyJet and Norwegian are below, Southwest and Ryanair
above the peers’ average ASK. The gap is rather huge, and reflects the relative size of the peers: both, easyJet and Norwegian operate smaller fleets and have lower ASK.
(easyJet’s ASK growth-rate is also slightly below average.) Driven by the increase of aircraft and routes operated, Ryanair’s ASK has been increasing consistently over the entire review period105. Southwest starts with the highest ASK (in absolute numbers) in 2010. The huge increase in 2011 is caused by adding more than 150 aircraft. In the
following years, Southwest grows around average. Overall ASK show no significant shift in market share over time.
3.4.3 Load Factor
ASK reflect the capacity, while load factors show, to what extent seats are actually sold, in other words how booked-out flights are (Feng & Wang, 2000).
𝐿𝑜𝑎𝑑 𝐹𝑎𝑐𝑡𝑜𝑟 =𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝐹𝑙𝑜𝑤𝑛 𝑆𝑒𝑎𝑡𝑠 𝐹𝑙𝑜𝑤𝑛
Equation 4: Load Factor
easyJet from the start has the highest performance by far with a load factor consistently between 87 and 92%, indicating, that around 90% of all available seats are sold106. Ryanair is the only carrier able to catch up, as it raises the load factor to 93%
in 2016, based on a strategy to aggressively marketing
“excess” capacities with (very) low-price “last-minute special offers”. Southwest’s load factor is between 79 and 84%, meaning between 21 and 16% of its capacity, which on average equals one out of 5 or 7 aircraft, is wasted and flies across skies with no passengers on board. Similar to Southwest, Norwegian has a load factor of around 77% to 86%; therefore 14% of its capacity is producing costs, but no revenues. easyJet outperforms its peers, also due to its approach towards marketing seats107.
105 Section 3.4.5 provides more details regarding the development of Ryanair’s fleet.
106 The high load factor indicates, easyJet has very limited room to improve seat revenues given the existing fleet and routes and growing non-seat revenues is therefore c.p. even more important.
107 Section 2.5 provides more details regarding the marketing strategy.
Figure 11: ASK Development
Figure 12: Load Factor Development
39
3.4.4 Revenue Passenger Kilometers (RPK)
Revenue passenger kilometers108 relates to the number of paying passengers an airline transports.
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝐾𝑖𝑙𝑜𝑚𝑡𝑒𝑟𝑠 = 𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟𝑠 𝐶𝑎𝑟𝑟𝑖𝑒𝑑 𝑜𝑛 𝐹𝑙𝑖𝑔ℎ𝑡 𝑆𝑡𝑎𝑔𝑒 ∗ 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑜𝑓 𝐹𝑙𝑖𝑔ℎ𝑡 𝑆𝑡𝑎𝑔𝑒
Equation 5: Revenue Passenger Kilometers
The figure is obtained by multiplying the number of paying passengers on each flight with the corresponding flight distance (in kilometers). All peers increase their RPK over the review period, referring to 2011 Southwest being the strongest winner.
3.4.5 Number of Aircraft Operated
As the number of aircraft operated, is a basis for calculating ASK and load factor, it is closely tied to a carrier’s revenue
and profit potential: the more aircraft an airline operates, the more tickets it can sell (Feng & Wang, 2000). If the fleet is large, but revenues are small, this c.p. indicates (i) many tickets are sold, but too cheap and/or (ii) not enough tickets are sold. easyJet operates the third largest fleet, and can therefore neither match the absolute number of tickets Southwest109 and Ryanair sell, nor their overall revenue. Ryanair has the second largest fleet.
In 2016, its revenues were consequently significantly higher than easyJet’s110. Southwest is the largest carrier in number of aircraft operated, which also explains its significantly higher revenues111. Norwegian operates the smallest number of aircraft and generates the smallest revenues, too. With the exemption of Southwest112, all peers increase the share of owned aircraft in their fleet substantially over time: easyJet from 64 to 74%, Ryanair from 78 to 87%, and Norwegian from 25 to 73%. One explanation could be that the larger a company gets, the more aircraft they need, the larger the discounts and the more attractive buying aircraft becomes and it also saves leasing companies’ margin. Another reason could be the very low interest environment that makes financing acquisition cheaper.
108 RPK are interlinked with ASK for a given load factor and with load factor for a given ASK.
109 However, easyJet’s profitability ratios, even though the carrier operates on a smaller scale, are healthy, also based on the superior load factor; in other words: the company is using its fleet effectively. Section 3.4.3 provides more details.
110 Since neither Southwest’s annual report for 2016 nor other corresponding information has been released yet, it is not clear, what in details caused the increase in aircraft operated.
111 However, Southwest is also an example for the rule, that being larger not necessarily means being more profitable in absolute or relative terms. Furthermore, it shows, a larger fleet does not even guarantee more revenues, again neither in absolute nor in relative terms. At the end it is all about efficiency. Section 3.4.5 provides more details.
112 A specialty of Southwest is that they sublease aircraft they own through the acquisition of AirTran, to Delta Airlines.
Figure 13: Revenue Passenger Kilometers Development
40
Figure 14: Owned vs. Leased Aircraft Development
3.4.6 Available Seat Kilometers (ASK) per Aircraft
ASK per aircraft calculates the (on average) per aircraft available seat kilometers:
𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟𝑠 𝑝𝑒𝑟 𝐴𝑖𝑟𝑐𝑟𝑎𝑓𝑡 =𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟𝑠 𝐴𝑖𝑟𝑐𝑟𝑎𝑓𝑡
Equation 6: ASK per Aircraft
As the ASK are one of the key drivers of airlines profitability, the more ASK an aircraft c.p. flies p.a., the more efficient the airline is using its fleet. easyJet’s ASK per aircraft is almost stable over the review period, which indicates efficiency, as adding aircraft always bears a risk of watering down profitability. Norwegian outperforms with 495 ASK per aircraft in 2015 (easyJet’s ASK come only at 348). One possible reason could be that Norwegian also provides long-haul flights. Ryanair also has a higher ASK per aircraft than
easyJet (e.g. in 2016 413 vs. 341), suggesting that Ryanair found a way to use its available aircraft more efficiently, and its load factor improvement in 2016 confirms this analysis113.
113 Within the peer group, Ryanair and easyJet have the most homogenous fleets (i.e. the most homogenous split or less biased average ASK per aircraft). On the one side, they so profit from economies of scale (in terms of e.g. purchase prices and maintenance costs). On the other side, this may come at the cost of not being able to fully exploit a given route’s passenger potential (if the “average” aircraft is too small) or to fly with “overcapacity“ (if the “average” aircraft is too big) and increase costs per paid-seat. Be it as it may, homogeneity is c.p. paid for with lesser flexibility.
Figure 15: ASK per Aircraft Development
41
3.4.7 Sectors and Routes Flown
Obviously, the more airports are c.p. served, the broader the portfolio of routes (Feng & Wang, 2000)114. Adding routes also provides access to more travelers and thus helps increasing revenues115. easyJet holds the number of airports served more or less constant. In 2009 it serves 125, by 2016 132 airports (+5.5%), however, easyJet (due to its strategy to focus on a given number of top tier airports and to expand routes from there) increases the number of sectors and routes operated from it current bases substantially over time116. Ryanair shows an even stronger expansion and increases the number of airports served from 155 to 200, showing a growth of around 30% over the review period. Norwegian has also been expanding: from 57 airports to 138 in 2015, representing a growth of around 43%117.
3.4.8 Metric Tons (MT) per ASK
Metric tons per ASK is about fuel efficiency, it shows how many MT of fuel are used up for each available seat kilometer.
Correspondingly, the less MT per ASK the company c.p. uses, the more efficient its aircraft operate. In line with environmental requirements, EPA e.g. calls for a 4% reduction in overall fuel consumption (Climate Central, 2016), all companies reduced fuel consumption per ASK. Currently, it seems that Southwest shows the largest improvements. The observed drop in 2015, however, could also (i) be explained
by the overall drop in USD-denominated oil prices (and would therefore be more of a “currency issue” in the comparison than a real reduction in fuel consumption) and/or (ii) indicate Southwest is a latecomer, following with a time lag the European peers, who based on stricter regulations had to look at environmental issues earlier (in this case it is more of a base effect). As easyJet has announced to modernize its fleet further, it can
114 Taking-over regional carriers has historically been an important way to increase the numbers of routes operated.
115 The thought assumes that passenger growth on a given route has a certain “natural” limit, considering that if a region served by a specific airport has a population of x million people (i.e. potential travelers); each of them can only fly “once” p.a. into summer vacation.
116 As outlined in Section 2.4.3.4, easyJet focuses on being present at premium airports (i.e. in the important European cities/regions) and to expand the routes served from these hubs rather than adding airports constantly or acquiring regional carriers. If easyJet was forced to acquire (e.g. resulting from BREXIT, as analyzed in Section 7.4), the lack of experience may result in questioning their ability to successfully integrate. As a consequence, easyJet could most likely prefer a smaller acquisition that allows for an easier integration.
117 Southwest does not reveal the number of airports served in their annual reports and is therefore excluded from the analysis.
Figure 16: Airports Served
Figure 17: Metric Tons per ASK Development
42 be assumed that its MT per ASK will decrease further.
3.4.9 Staff per Aircraft
Staff per Aircraft is a proxy of how many employees, including cabin crew as well as administrative staff, are on average required to operate one aircraft.
𝑆𝑡𝑎𝑓𝑓 𝑝𝑒𝑟 𝐴𝑖𝑟𝑐𝑟𝑎𝑓𝑡 =𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝐴𝑖𝑟𝑐𝑟𝑎𝑓𝑡
Equation 7: Staff per Aircraft
The analyses prove easyJet and Ryanair employ the lowest number of staff per aircraft, also explaining the relatively low employee costs (in percent of revenues). easyJet comes in at around 40 people per operated aircraft, Ryanair at around 35.
Both indicating they have rather low overhead costs, assuming that their numbers of cabin crew per aircraft are similar. In contrast Southwest needs around 70 people to get one plane into the air.