ANALYSIS: EasyJet sees yields driving first half improvement

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EasyJet is citing its sharper profit focus on route managment and capacity cuts among rival carriers for its improved revenue performance which helped it almost halve its interim losses.

The airline cut pre-tax losses to £61 million ($93 million) over the traditionally loss-making first six months of its financial year, compared with £112 million for the same period last year. The carrier lifted its revenues 9% during the six months ending March 2013 to £1.6 billion.

"We've had a strong start to the year with significantly improved winter performance," says EasyJet chief financial officer Chris Kennedy during a first half results conference call today. "The primary driver of the revenues growth has been improved yields." The carrier managed to lift average revenue per seat from by nearly £3 to £53.39 in the first half.

This in part reflects improved revenue management. Kennedy cites the "strategy of improving the network, earlier decisions of winter thinning and redeployment of aircraft from the Madrid base to higher performing bases" as contributing to the improved revenues, alongside revenue management tools.

"In 2012 56 routes were delivering less than 40% of the average return," explains company chief executive Carolyn McCall. "By the end of the first half this has been dropped to just 20." The airline cut 18 of the under-performing routes altogether, while performance has improved on the other 18 routes.

Another factor in the healthier yield picture has been reduced capacity among its director competitors. "Competitor capacity decreased 2.3% in the first quarter and 3.3% in the second quarter. That's a 2 million seat decline [from competitors] on our routes in the winter," says Kennedy.

"In the last 12 months we have seen a move to more rational behaviour in the industry similar to the trends seen in the US over the past five years," adds McCall. "The summer period is always more competitive than the winter period. We expect increasing competition in some of our markets. However overall competitor's capacity is expected to reduce by 1% on our routes this summer."

"We have cautiously grown capacity this summer [3.5%] and allocated capacity to airports that will provide returns," she adds. The airline expects revenues per seat, at constant currencies, to grow around 4%.

She points to competition capacity having come out its markets in Italy, Spain, Germany and in the French regions. In Spain the carrier took its own action, closing its under-performing base at Madrid in the winter amid rising airport charges, the country's economic woes and over-capacity. "We still fly from Spain a lot. UK-Spain is still a very strong part out of the business," says Kennedy. "[But] outbound from Spain with the economics and the amount of capacity, its still a very depressed market."

McCall adds: "The competitive environment continues to evolve with legacy carriers looking to restructure, to offset their continued short-haul losses and weaker carriers are retrenching and cutting capacity. EasyJet remains well positioned to deliver in this environment. She describes some of the moves by network carriers to shift capacity onto lower-cost subsidiary more of a "reconfiguration" of capacity.

"Germawings is Lufthansa with different clothes on. Its going to be interesting how things pan out. They have tried all sorts of things. But as far as we are concerned we are competing against Lufthansa in Europe," she says.

Perhaps in a nod to the thorny issue of the carrier's future growth - which in recent years has been wrapped up in founder Stelios Haji-Ioannou long-running battle with the board - EasyJet has outlined the size of the opportunity it believes it can take from airports it is already strong at.

"We strategically know we can grow organically in our core markets and can continue to do that for a number of years. It is a low-risk strategy in that regard," says McCall.

"Around 67% of EasyJet annual capacity touches our top 20 airports, which equates to around 46 million seats," she explains. This equates to a 22% share of the total short-haul seats in these markets. While other low-cost carriers hold around a quarter and transfer traffic to long-haul flights 12% of the capacity, it an opportunity on the remaining 41% of seat capacity at these top 20 airports. "86 million of these seats serve point to point demand currently flown by non-LCC carriers and we believe have a significant cost advantage against these competitors and this is our primary focus for profitable growth," she says.

 easyjet top 20

 Source: EasyJet first half results presentation

The carrier has been linked with interest in acquiring more slots at one of these airports, London Gatwick, as Flybe has confirmed it is in talks with a number of parties over its slots at the south London airport. McCall would not be drawn on specific, but says: "We have a really good slot portfolio in many of the slot-constrained airports, like Paris Orly. We know where we want to get more slot slots, we know where we make the money and we always keep an eye on it."