European low-cost airlines could have an advantage in a postcovid world

LONDON – European low-cost airlines have clear advantages over the largest flag carriers in a post-pandemic world, analysts told CNBC, despite massive support packages deployed by governments around the world.

It has been a bruising moment for airlines as the coronavirus pandemic has halted travel. But now, low-cost carriers seem to show signs of recovery compared to domestic carriers, who can often be subsidized or given preferential treatment.

“You see that legacy carriers can’t move that fast compared to the pandemic’s lost-cost carriers,” Paul Charles, CEO of luxury travel consultancy The PC Agency, told CNBC’s “Squawk Box Europe” on Monday.

The International Air Transport Association said earlier this month that both domestic and domestic flights increased in July compared to June, but demand remained “well below pre-pandemic levels.” In Europe alone, passenger traffic continues to fall by 56.5% compared to July 2019.

Still, easyJet, a low-cost British company, said it expects to fly up to 60% of its 2019 levels in the three months between July and September. In comparison, IAG, owner of British Airways, said it only expects to fly around 45% of its 2019 capacity during the same period.

Lufthansa, another flagship carrier, expects to fly around 40% of its 2019 levels throughout 2021. Budget airline Ryanair, meanwhile, said its year-round tax traffic in the March could reach between 90 and 100 million passengers, representing between 60% and 67% of the 148.6 million passengers that flew throughout the year to March 2020.

Laura Hoy, a Hargreaves Lansdown equity analyst, said low-cost airlines benefit from focusing on short-haul flights. These are proving to be more attractive to consumers, given the constant travel restrictions and uncertainty about the pandemic.

In addition, Hoy added that amid economic uncertainty and the potential for future disruptions, consumers do not want to spend much on flights, which also benefits the business model of low-cost airlines.

Shares of Ryanair have increased by 1.8% over the previous year. Shares of Wizz Air, another low-cost company, rose 7.5% in the same period, while those of easyJet fell 9%. Wizz Air had approached easyJet over a possible merger, but the latter rejected the offer last week.

On the other hand, IAG has fallen 2.6% year-on-year and Lufthansa shares are also down 19.7% during this period.

“You’ll see that easyJet can take advantage of more opportunities. That means it can get more space, but it can also move its fleet faster to take advantage where there’s demand,” Charles of The PC Agency also said.

This is despite the massive cash injections that different governments made as a result of the pandemic to flag carriers, specifically the 9 billion euros ($ 10.6 billion) that the German government gave to Lufthansa. British Airways also received a £ 2bn loan from the UK government in December.

“The help went through a bad time for them,” Hoy said, but did not support their growth. Financial aid was included with many conditions, including restrictions on dividend payments, he added.

In addition, there are questions about how far governments will be willing to go to keep their carriers afloat. They have supported the sector, but some are facing legal action for it and are generally forced to charge cash after efforts to contain the economic shock of the virus.

“There will be a shift in tune,” Charles said, “as governments seek to unload where they can, they can’t afford to keep some of those stakes, they prefer charge them and see private sector buyers inject more innovation into the sector ”.

“I think they will be loosened over time, especially in Europe, by some of these restrictions on who can own transport companies, so now is the time to really see more private capital start to emerge. And this is of course the backbone, of course, of many short-haul carriers capable of gaining their market share from these old carriers, ”he added.