Norwegian, Ryanair and EasyJet: high flying low-cost airliners

Last week, low-cost airline Norwegian Air Shuttle (‘Norwegian’) reported sky-high third-quarter results with earnings exceeding 1bn NOK - its best ever quarterly results. Chart 1 highlights Norwegian’s clearly impressive growth in earnings over the last five years. Despite being a fairly new player, compared to its peers, Norwegian has in spite of massive expansion, managed to grow both revenues and earnings.



Dominating growth
Whilst Norwegian reigns supreme on earnings and passenger number growth (see chart 2), EasyJet and Ryanair dominate the European low-cost market with 509 and 1,300 routes respectively. They both possess over 200 aircraft in their fleets, and hold around 50 percent of the top 100 routes in Europe.

Costs are key!
Chart 3 presents some of the key performance indicators (KPI’s) for each airline. Unit cost or CASK, a crucial measure for the low-cost carriers, is displayed next to the ticket revenue per kilometre flown or yield. To compliment this, plane utilization or Load Factor is displayed. This highlights operational efficiency, whilst keeping in mind how full the flights are. Interestingly,despite Norwegian having the highest unit cost it maintains the largest revenue per km flown whilst maintaining solid passenger numbers. This is primarily due to the airliner largely operating in duopolistic markets in the Nordic regions.


All three airlines are in the process of replacing their current fleets with newer fuel-efficient aircraft. Norwegian’s new fleet will almost double seat capacity on short-haul routes from 2009-2014 and is expected to reduce fuel consumption and CO2 emissions by more than 25 percent per passenger from 2008-2015. Next year, Norwegian expects its average fleet age to be three years, while EasyJet’s and Ryanair’s are currently at 3.9 and 3.7 years respectively. Furthermore, Chart 4 displays the rapid cost reduction Norwegian has managed despite its extensive fleet renewal.



Chart 5 exhibits the massive growth in ancillary income that de facto grows faster than ticket revenues. This revenue is made up of extra baggage fees, credit card fees, seat reservation fees and fuel surcharge, all contributing to an increasingly large proportion of total income.



Strategy matters
With the brand new Boeing Dreamliner aircrafts scheduled for delivery late 2012, Norwegian will be one of the first low cost carriers (LCC) in the world to launch long-haul routes to expand its network. With the new aircraft, it is anticipated that Norwegian will be able to cut operating costs by 30 percent/have 30 percent lower costs than its LCC peers and fly the long-haul routes at a 50 percent reduction to the main full fair competitors.

Investors should consider that competition will be fiercer, as Norwegian now competes with established network carriers in new markets. Ryanair and EasyJet are also sharpening their strategies. Ryanair has acquisition plans regarding 300 new aircraft, of which 50 will operate on Scandinavian routes in 2015, representing a massive expansion in the region. EasyJet has introduced EasyJet Lean to lower cost categories against the other LCCs.

Keeping a low CASK remains crucial for success given the airliners’ new strategies, and only time will tell which of the airlines will take the crown and reap the rewards.