The creation of the European Union has opened up a huge market for business with the airlines industry a case in point. Budget airlines Ryanair and EasyJet have clearly benefited by taking market share taken from the national carriers. In our view, EasyJet remains well placed given its expansion plans and the recent fall in the oil price.
Warren Buffett has said that investing in the airline carriers is best avoided due to low returns on capital and the cyclical nature of the industry. A look at the long-term share price chart of airlines like IAG (owner of British Airways) certainly bears this out.
A possible exception to this rule are the budget airlines due to their high occupancy rates and efficiency levels. The original budget airline, and the world's largest, is US group Southwest Airlines which has delivered strong investor returns over the long-term.
Both Ryanair and Easyjet copied the business model of Southwest Airlines and have seen robust growth since they started out. Looking at the returns on capital for EasyJet and Ryanair and they are both respectable and meaningfully above those of established peers like Luthansa and IAG.
Budget airlines break the mould
Source: EasyJet presentation
It is worth noting, though, that like the rest of the industry the budget airlines see profits take a hit during downturns. At the start of the global financial crisis, from 2007 to 2008, the share price of EasyJet fell from £7 to £2.70 and Ryanair fell from over €6 to €2.
Nevertheless, with Europe in recovery mode the outlook for EasyJet is positive and the company set for robust fleet expansion. The base case scenario sees the number of planes increase by 37% over the eight years - from 226 in 2014 to 311 in 2022.
EasyJet is also shifting towards more efficient planes with a move away from the A319 and towards the A320. The A320neo is the latest version of the A320 and should be 11-12% more efficient in terms of cost per seat than the A319.
The group is also now focusing on attracting business passengers which it is well placed to do given the group's focus on primary airports. By contrast Ryanair has had an emphasis on non-primary airports which are some distance from the main destination i.e. Girona airport for Barcelona.
A medium-term boost for EasyJet…
