European low-cost carriers ponder capacity crunch

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Capacity control is central to the near-term outlook at European low-cost giants EasyJet and Ryanair, as they face uncertainties over rising fuel costs and potentially slower passenger demand.

EasyJet, which is keeping capacity flat for the next winter season, is in the middle of a major fleet planning exercise that could result in it rescheduling Airbus orders. Ryanair passenger numbers will decline this winter as the budget carrier cuts net capacity over the second half of its financial year for the first time in a bid to counter rising fuel costs.

"The next 18 months is not going to be the easiest period for any airline," says EasyJet chief executive Carolyn McCall. "We're in the middle of the planning for the next two to three years. There are various levers we can use to control this," she says, such as lease extensions or returns, or even the deferral of orders.

 200th easyjet airbus, airbus
Ryanair's fuel bill will rise by about €350 million ($491 million) for the year to March 2012 and boss Michael O'Leary expects a sharp rise - nearly a third - in the final quarter of this year, where it is hedged at $97 a barrel. "That's why we're going to cut capacity during the winter," he says. "This will help us get costs down and keep fares up. It's the first time we have cut capacity."

CTAIRA analyst Chris Tarry says that after the phenomenal growth that EasyJet and Ryanair have enjoyed over the past decade, there are fewer opportunities for continued expansion. "They can't cut costs any more and in their markets it's difficult to cover the increasing fuel costs through fare increases," he says. "If you have to get fares up then you have to adjust capacity."

EasyJet took delivery of its 200th Airbus in May and, speaking at the handover ceremony, McCall told Airline Business that EasyJet will end its current financial year (on 30 September) with a fleet of 204 aircraft (202 Airbuses and its last two remaining Boeing 737-700s).

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 carolyn mccall (100), easyjet
 Chief executive Carolyn McCall on easyJet's strategy
"When I presented our strategy last November the plan was to grow capacity at 7% [annually] but I said we had fleet flexibility that meant we could flex growth down to 2% if we needed to, or up to 10%, if we needed to."

Facing growing uncertainties, such as the rising fuel price and Eurozone debt, McCall said EasyJet is now "deploying that flexibility" planning, but declines to be specific about revised near-term growth plans as it is "all work in progress".

EasyJet announced in January orders for 15 more A320s, and while McCall said these are "currently" due for delivery between late 2013 and 2015, she cautions that the airline is "looking at how we time those aircraft and use those to give us as much flexibility as we can".

In early June, the UK budget carrier reached a vital agreement with its pilots over a new pay and scheduling pact. Pilots will receive a 4% salary increase and a 5% rise in sector pay. "But crucially the agreement also goes some way to resolving some of EasyJet pilots' long-term concerns about rostering and scheduling," says pilots' union BALPA.

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Meanwhile, Ryanair could park up to 80 aircraft this winter, out of a fleet that will reach 294 Boeing 737s by next March, as it seeks to lower exposure to higher fuel costs and hang on to the yield gains it expects over the summer.

The Irish carrier, whose pre-tax profits jumped 27% to €451 million ($633 million) for the year ending March 2011, has increasingly grounded aircraft over the winter in recent years (including around 40 last year), but this is the first time its second-half capacity will be cut.

Despite cutting capacity 2% and 5% in quarters three and four, respectively, it will increase full-year capacity 4% in the coming year, increasing annual passenger numbers to 75 million.

O'Leary says Ryanair's final capacity adjustments will be driven by "what happens to oil, average fares and airport deals", adding that the carrier intends to be more tactical and keep the pressure on airport costs. "A starting point is about 80 aircraft, but it could be less," O'Leary says.

The second-half cuts are designed to hang on to the gains in the first half, as it sees yields up 12% helping it to repeat this year's €400 million net profit.

"We've got good visibility during quarter one and two and growth of 12% is attainable," says O'Leary. "We are still seeing stronger advance bookings at slightly higher fares than we would have done last year."

Despite slowing passenger growth from its historical norms, O'Leary still expects Ryanair to add at least six more bases over the next year, having opened eight new bases over the past year to take the total to 44. "I'd be amazed if we were not at 50 bases this time next year," he says.