Could the CSeries give EasyJet a new zest?

Could the CSeries give EasyJet a new zest? 23 October 2017

If there is one relationship which typifies the high stakes, politics and acrimony of international trade, it is the Boeing-Airbus duopoly. So when this long standing rivalry took a sensational new twist last week, it was unsurprisingly a mega news event in the aviation sector. Prompting this flurry of excitement was Airbus’ announcement that it will take a 50.01% stake in the CSeries jet programme of its smaller Canadian rival Bombardier, an aircraft that was little known outside of the industry until it hit headlines earlier this month, when it became subject to a proposed 300% tariff from the US Department of Commerce. The ruckus was initially triggered by a large order for the aircraft from US Delta Air Lines, leading Boeing to complain to the DoC that support given to Bombardier by Canada during the jet’s laboured development was allowing Bombardier to dump it at “absurdly low” prices.

The Airbus deal gives the CSeries improved economies of scale and access to a better sales network. It will also allow some of the aircraft to be assembled at Airbus’ Alabama plant, removing the spectre of import tariffs for its US customers. The Delta order was an ice breaker for the CSeries, which prior to that had received no new customer commitments for the past 18 months. Other airlines that are attracted by the efficiency, reliability and comfort offered by the CSeries, but which previously worried about the longevity of the programme due to Bombardier’s strained finances, may now follow suit. Indeed, Airbus’ subsequent announcement that it plans to harmonise the CSeries with its own product range has promoted Richard Aboulafia of Teal Group to raise its CSeries forecast by 50%, with the expectation it may go higher still[1].

The news that the CSeries has a secure future got us thinking about the role the aircraft could go on to play in disrupting the airline market. The conclusion we came to is that when EasyJet welcomes a new CEO in 2018, he or she could do a lot worse than adding the jet to the low cost giant’s fleet. The rest of this article sets out our analysis of EasyJet’s market position and a cost-benefit analysis weighing up the opportunities afforded by the CSeries with our estimation of the economics of operating the aircraft for EasyJet.

Lower cost

It has long been our belief at Aviation Analytics that EasyJet’s market position is weaker than either its record passenger numbers or rallying share price suggest. Our data shows that EasyJet’s seat costs are considerably higher than those of its low cost competitors, Ryanair and Wizz Air, and that this is hampering its ability to fill its aircraft as profitably.

Aviation Analytics’ Network Grandstand platform provides estimates of seat profitability, based on our accurate accounts-derived airline seat costs and average fares from our in-house Low Cost Fares Database. The table below shows the network average performance of the three carriers in the period Q4 2016 to Q3 2017.

Average fare Revenue per passenger Cost per seat
Profit per seat
Ryanair[2] £41 £52 £34 £15
Wizz Air
£40 £55 £42 £7
EasyJet £55 £66 £48 £12

These figures show how Ryanair’s ultra-low operating costs and strong ancillary revenues make it the most profitable of the three carriers, whilst offering the lowest headline fares. EasyJet’s higher cost base means that it is unable to match Ryanair on fares whilst maintaining profitability.

The impact of EasyJet’s higher fares is apparent in the following chart. This shows the network average yield curve for the three carriers in the first three quarters of 2017 and includes fully observed fares to the point of departure on all flights.

Network average yield curves (£ Revenue per Available Seat Kilometre)

What struck us here is the slight dip in EasyJet’s yield curve in the days prior to departure. This suggests that lower-cost Ryanair and Wizz are able to price more aggressively to secure early bookings, thus managing to achieve good load factors whilst taking full advantage of any late booking premiums that may be on offer. By contrast, EasyJet forsakes these premiums in order to fill its aircraft.

Finally, we can benchmark how the carriers’ networks are performing using our AAIndex, a measure of route performance using an A to E index, as follows:

Here we compare the performance of EasyJet and Ryanair, again in the period Q4 2016 to Q3 2017.

AAIndex performance split: EasyJet vs. Ryanair whole networks

The impact of EasyJet’s higher costs and depressed yields is apparent in the above charts, which show that 20% of the airline’s routes are loss making or highly loss making, compared to 9% for Ryanair, further supporting our conclusion that the airline is struggling to keep pace with its low cost rivals.

Small is beautiful

If Aviation Analytics were to counsel the incoming CEO of EasyJet, it would be our submission that adopting the CS100 jet – the smaller 108-133 seat CSeries model, which entered service with Swiss International Airlines earlier this year – would open up new markets where EasyJet would face less competition.

Firstly, the CS100 can access airports with runways of less than 2000m, which are currently subject to weight restrictions for Ryanair, with its fleet of B737s, or to Wizz’s A320/A321s. The more the runway is under 2000m and the further the flight, the greater the weight restriction, meaning that larger aircraft are no longer economically viable. In the UK this would expand the number of markets from Aberdeen, Belfast City, Southampton and Southend. In Europe, airports include Antwerp, Bern, Florence and Lugano.

Secondly, the reduced capacity of the CS100 would allow EasyJet to develop smaller markets with less risk. At its highest density, the CS100 has 15% fewer seats than EasyJet current smallest A319 aircraft, representing an equivalent reduction in risk to the airline.

The combination of undeserved markets with little fear of competition from Ryanair, as well as the reduced risk, should be an enticing prospect for EasyJet, as it dangles the prospect of strong fares and high yields to counterbalance the downward pressures elsewhere in its network.

EasyJet CS100 vs. current fleet average

From a revenue perspective, then, the CS100 offers EasyJet the opportunity to enter smaller, high yield markets. But how do the economics stack up?

The following table compares EasyJet’s current fleet average seat costs with our estimates for the CSeries. Below is an explanation how we arrived at these figures.

EasyJet CS100 vs. current fleet average seat costs (£ cost/seat)

Aircraft Ground Other Total
Ownership Fuel Maintenance Crew Navigation Overheads
Current fleet average £3.42 £13.87 £2.95 £15.78 £6.75 £4.18 £5.02 £51.98
CS100 estimate £6.51 £11.03 £2.06 £16.57 £7.75 £4.38 £5.02 £53.32

How did we arrive at these numbers?

This section sets out how we estimated the cost translation from EasyJet’s fleet average to the CS100.

Our calculations are based on EasyJet’s 2016 fleet of 257 A319 and A320 aircraft, with an average capacity of 167 and an average Maximum Takeoff Weight (MTOW) of 77 tons. The fleet flew 482,110 sectors for a total of 934,223 block hours in 2016. This and all costs are taken from EasyJet’s FY2016 Annual Report.

The CS100 has 133 seats and a MTOW of 61 tons.

Ownership:

  • EasyJet spent £275 million on aircraft ownership costs in 2016. This equates to £570 per sector/£3.42 per seat.
  • Based on the above, the average lease cost of EasyJet’s aircraft was £89,170 per month.
  • The estimated lease cost of a CS100 is $220,000 per month. We assumed that EasyJet could negotiate a 20% discount, reducing this to $176,000. On an exchange rate of $1.3:£1, the monthly cost to EasyJet of leasing a CS100 would therefore be £135,385 (152% of what it currently typically pays for each aircraft).
  • Multiplying the current sector cost by 152% and dividing by the capacity of the CS100 gives a seat cost of £6.51.

Fuel:

  • EasyJet spent £1,114 million on fuel in 2016. This equates to £3,211 per sector/£13.87 per seat.
  • We also know that EasyJet paid £479 per ton for fuel in 2016. Based on the above, the airline used 2,325,678 tons of fuel that year. This equates to an average of 2.49 tons per flying hour across its current fleet.
  • The CS100’s advertised fuel burn is 1.58 tons per hour (63% of the current average).
  • Multiplying the current sector cost by 63% and dividing by the capacity of the CS100 gives a seat cost of £11.03.

Maintenance:

  • EasyJet spent £237 million on maintenance in 2016. This equates to £492 per sector/£2.95 per seat.
  • The CS100’s MTOW is 80% of EasyJet’s current fleet average. We assumed that the smaller aircraft’s maintenance costs would be 20% lower than the A319/A320 and a further saving of 30% for a new aircraft.
  • Applying these discounts to the current sector cost and dividing by the capacity of the CS100 gives a seat cost of £2.06.

Handling:

  • EasyJet spent £1,267 million on handling in 2016. This equates to £2,628 per sector/£15.78 per seat.
  • We assumed a slight increase in costs of 5% due to the diseconomies of scale of the smaller aircraft.
  • Multiplying the current sector cost by 105% and dividing by the capacity of the CS100 gives a seat cost of £16.57.

 Crew:

  • EasyJet spent £542 million on crew in 2016. This equates to £1,124 per sector/£6.75 per seat.
  • The CS100 requires three cabin crew, as opposed to four on EasyJet’s current fleet. We assumed that a Captain earns £120,000, a First Officer earns £80,000 and Cabin Crew earn £25,000. At £275,000 the crew bill of the CS100 is therefore 8% lower than that of the A319/A320.
  • Multiplying the current sector cost by 92% and dividing by the capacity of the CS100 gives a seat cost of £7.75.

Navigation:

  • EasyJet spent £336 million on navigation in 2016. This equates to £697 per sector/£4.18 per seat.
  • We assumed that EasyJet would pay 20% less in navigation fees for the smaller CS100 than the A319/A320, but also a slight increase in costs of 5% due to diseconomies of scale.
  • Adjusting the current sector cost accordingly and dividing by the capacity of the CS100 gives a seat cost of £4.38.

Overheads:

We assumed that overheads are allocated per seat across EasyJet’s network. This cost is therefore the same for all aircraft.

The bottom line

Our analysis shows that the CS100 would have an average seat cost in the range of £53.32 for EasyJet, which is 2.5% higher than its current fleet average of £51.98 and probably close to that of the A319 given that the airline operates a mix of A319s and A320s which make up the fleet average figure. This represents a remarkable improvement on the economics of previous regional jets, would we would traditionally expect to have an 8-10% cost premium on those of large aircraft, reflecting the considerable fuel efficiency achieved by Bombardier. The CS100 thus offers EasyJet an opportunity to enlarge its network at smaller airports and enter underpenetrated markets where it would face less competition, with seat costs that still enable it to offer a low cost product. A 15% reduction in risk for a 2.5% increase in costs looks like a good trade off to us. Will the new EasyJet CEO agree?

Get the full picture. How do other LCCs stack up against EasyJet? For average fares, seat costs and route performance, contact Jon Soars on +44 (0) 207 856 0159 or at jonsoars@aviationanalytics.com

[1] Reported in Forbes

[2] Ryanair and Wizz data converted on an exchange rate of €1.12:£1

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