Musings of an Aviation Investor
Low-Cost US vs Europe — A tale of two markets Nov/Dec 2024

The bifurcation of airline performance across the North Atlantic continued through Summer 2024 from the prior year.

In the US domestic market, it would not have been thought possible after the material yield and fare declines experienced in the summer of 2023, but further declines transpired into 2024 hitting airline profitability, particularly the LCCs.

In 2023 these players blamed shifting demand to international flying. In the most recent period, the blame has shifted with the LCCs exclaiming that passengers now demand extra comfort and were prepared to pay for the premium product offerings from the Majors.

With high density basic products, the LCCs impugned that they lost traffic and resultantly during 2024 decided to shift strategy away from their core business models to include premium seat offering. This deviation from their cost focus resulted in them incurring substantial expense of interior aircraft refits but also higher marketing / distribution expenses directed towards attracting these discerning new customers.

The real causes of margin erosion should be pointed towards the simple paradigm of capacity. There was a continued deployment/delivery of new aircraft far in excess of what the networks could successfully incorporate, depressing yields, while costs from the excessive labour pay awards post-pandemic had pushed unit costs above acceptable thresholds for these cost driven LCC strategies.

Carriers relented on capacity too late in the day and finally began to rein in schedules mid-year. This began to have a positive impact on yields in late Summer and into the fourth quarter but too late for Spirit, which filed for Ch.11 bankruptcy protection in November. Management could and should have taken corrective action early in the year.

With global narrowbody capacity at a premium Spirit could have more aggressively drawn down schedules for the Spring/Summer periods at a time when it could have secured alternative homes for excess aircraft at the handsome market lease rates then available. So, mismanagement a valid concern and subsequent executive bonuses distributed when Spirit equity had been toasted demonstrated a capitalist system injustice of the highest order.

Low-cost airlines in Europe on the other hand performed admirably particularly after scares and profit warnings mid-year (Ryanair being the protagonist with its July profits warning that muted the whole sector) that hit share prices hard, but in the outturn the concerns were overly pessimistic.

Operating margins for the all-important Summer quarter were reasonable, albeit reduced from the prior year.

Impressively two of the important UK players, Jet2 and easyJet, managed to maintain operating margins driven by a buoyant package holiday market.

Most of the other main LCC players incurred margin contractions year-on-year with cost increases outpacing flat yields. Many had overstaffed for Summer 2024 ahead of expected higher aircraft capacity, which finally did not arrive due to manufacturer induced delivery delays and/or continuing groundings due to Pratt & Whitney GTF engines.

The decent financial performances in Europe have assisted the further recovery in European carrier balance sheets which had been decimated during Covid. This has allowed several airlines to increase dividends and for some to institute share buybacks.

What really heightened the divergent performance across the Atlantic for the Low-Cost participants was seat capacities.

The increases in the US over the last 24 months were just too much for that market to bear and attempts to reign in schedules were too late, while in Europe perhaps out of some good fortune, new aircraft deliveries streams were tempered and a little behind US counterparts and PW GTF engine issues impacted only one of the major players, Wizz.

The Wizz share price performance has been dismal. Albeit, unlucky with its exposure to Israel and with high GTF groundings, management must take its share of the blame. Jószef Váradi, the CEO and founder, has been instrumental in the carrier’s massive growth and success, but there is a concern that he has lost his grip on key operational issues. An expensive commitment to wet lease capacity the carrier did not need in the second half of 2024 together with likely problems arising from a move of the airline’s commercial team from Geneva to Budapest are bad signs.

Much weaker operating margins YoY for the Summer 2024 Quarter dropping from 24% in 2023 to 17% and the loss of the coveted Investment Grade credit rating have assisted a share price decline from £22 at the start of the year to end at £14.39 by 31 December. Váradi may not be finished, and he is a sage hand, so performance in 2025 will be the telling factor and Wizz should not be written off just yet.

Share prices for US carriers had already been hit hard after weak performance in 2023, so 2024 price directionality was better while in Europe stock prices were volatile taking a big mid-year plunge prior to recovery after the release of the Summer quarter results, so somewhat treading water on average. Jet2 and IAG were the standouts for a substantial uplift in share valuation over the calendar year.

The market overall (both US and Europe) looks promising going into 2025 and airline share price recovery in 2024 should continue driven by strong passenger booking momentum, continuing aircraft supply constraints that will not be solved in the next 12 months as well as a tailwind on fuel prices particularly for those European based carriers that have hedged Summer 2025 consumption.

There will be a labour cost tailwind in Europe for those airlines that had prematurely staffed up for Summer 2024, with such excess staff becoming efficiently deployed in 2025. A strong US dollar post the Trump election victory is a negative to non-US carriers and there are plenty of unknown impacts from tariffs and a changed US Foreign policy under Trump which makes for a volatile space, but with airline stocks on an earnings basis being considerably undervalued versus the overall market, prospects for 2025 growth momentum are reasonably positive.