Wednesday 17 February 2021 7:18 am

Budget airlines primed for land grab as flag carriers face change of flight path

After nearly a year of intense disruption, one could be forgiven for expecting even Ryanair’s perennially bullish boss Michael O’Leary to be a little downcast about the state of his industry.

But despite the near daily cries of anguish issuing from the airlines sector, the Irishman’s eyes are fixed firmly on the future.

Speaking after the release of the carrier’s third quarter results, he said: “We’ll emerge with a much-lower cost base and where there is significantly reduced capacity, we’ll look to take advantage.

“We’ll use that to take as much market share as we can cope with”, he told Travel Weekly.

He’s not the only one. In recent weeks, Easyjet’s Johan Lundgren and Wizz Air’s Joszef Varadi have expressed similar sentiments: once flying starts up again, they are ready to pounce on a disrupted market that looks set to undergo rapid change.

Low-cost carriers lead land grab

With the short-haul air travel market expected to recover first, all three have the same goal in mind: to grab as much European capacity as possible, largely at the expense of the so-called legacy carriers: British Airways, Air France-KLM, and Lufthansa Group.

Lundgren in particular was clear that the huge bailouts that the latter two players received from their respective governments had opened the door for his airline.

“Air France now has limits on the amount it can fly domestically or by short-haul for sustainability reasons, and that’s something we can take advantage of”, he told City A.M..

For aviation consultant John Strickland, however, it is Ryanair and Wizz Air that look the likeliest winners from the land grab.

“They’ve got large cash resources in the bank to keep going through the crisis, they have modern, efficient fleets with planes still being delivered, and they are very cost focused”, he told City A.M..

“Historically, they’ve both been very dynamic in trailblazing new markets and new routes, but now there are far more opportunities to pick off routes that already exist and to move into airports they’ve never served before.”

Slots waiver ‘distorting’ market

But despite their ambitions, there’s one element holding Messrs O’Leary and Varadi back right now, as Chris Tarry of consultancy CTAIRA explains.

“We’ve still got a distortion in the European and UK markets in the form of the airport slot waiver, which is preventing a number of airlines being able to enter new routes and markets other than on what is an unsatisfactory ad-hoc basis.”

Under the normal regulations airlines which do not use 80 per cent of their lucrative take-off and landing slots have to cede them to rival carriers.

These rules have been suspended since last March – and recent decisions from regulators across the continent mean the waiver will now last until at least the beginning of the winter season.

In effect, this means that legacy carries need not worry about ramping up capacity in order to keep their slots – thus shutting down expansion opportunities for airlines like Ryanair.

Competition issues are one of O’Leary’s particular bugbears – the Irishman has already filed 16 lawsuits against the European commission over state aid – so the waiver decision could well have legal ramifications.

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“It is increasingly becoming clear who is suffering damage as a result of what is seen as a distortion, and where legal action is increasingly inevitable”, Tarry said.

What next for flag carriers?

With long-haul and business travel widely expected to take a lot longer to recover, the picture for flag carriers is not a pretty one.

To handle the collapse in revenues, carriers have been forced to borrow more and more from governments and banks – but it can’t go on forever, says Strickland.

“There comes a point when you have to start paying it back, so you end up loaded down with debt”, he said. “And you can’t just keep piling it on”.

At the moment, BA owner IAG looks in a relatively safe position, with liquidity of €9.3bn – although its debt pile did stand at over €11bn as of January.

Instead, Strickland says, these carriers will have to move away from the long-haul market for the time being and see where they can compete with their low-cost rivals.

“It’s not straightforward, but they can do it. BA, Air France and Lufthansa have stepped up and competed on leisure routes in recent years, and now you can get just as cheap flights to some destinations like Ibiza with BA as you can with Ryanair”.

Tarry agrees that a fundamental business reset is needed, which could lead to a dramatic shift in what airline fleets look like.

“If I was head of strategy at BA, I’d be straight off to Airbus to acquire as many additional A350s as I could to accelerate the restructuring of my long haul fleet; the result would be that  I wouldn’t have so many seats to fill and would emerge with a more efficient fleet and in a sweeter spot on the yield curve – the reality is that it is going to take a number of years before long haul volumes recover to what they once were”.

The latest generation of single-aisle jets, both Tarry and Strickland pointed out, can fly both short and long-haul trips – meaning the days of the jumbo jet could well be behind us.

In every crisis, opportunity

It’s clear that the aviation market is on the brink of a fundamental restructuring, but this shouldn’t be confused with its demise, says Tarry:

“Some observers have suggested that  Covid is an existential threat to the industry, but it’s not really – people clearly still want to fly. It’s the supply side that’s going to have to adjust and whilst that is normal after any crisis the adjustment will be much more material this time.”

And as with any crisis, there are always winners and losers. At the moment, the flight plan looks pretty clear; the question is, can BA and its peers act quickly enough to change the destination?

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