Fitch Ratings: European Airlines' Mixed 1Q/1H Results, Gap Deepens

Fitch Ratings-London-06 August 2019: Recent financial results from key European airlines support our view of a growing disparity in their performances, Fitch Ratings says. The gap between strong and weak airlines was already pronounced, but now even the larger companies are diverging amid an increasingly challenging market environment.

Wizz Air posted the strongest performance among its peers' with its operating profit rising 25% in 1Q of its financial year to 31 March 2020, while Lufthansa's and Air France-KLM's operating profit dropped by more than 50% in 1H19.

We forecast full year EBIT to remain flat or improve marginally for British Airways (BA; 2019) and Ryanair and Wizz Air (FY to March 20). We expect all three companies to maintain solid credit metrics commensurate with their ratings, barring any severe industry shocks. Their performance will be determined by their cost profiles, market positions, geographic diversification and their stage in the development cycle. Industry-specific factors, including volatile fuel prices, will also continue to affect their results. While their load factors remained relatively stable in the reported periods, the second half of this year is more unpredictable because of Brexit.

We forecast yields to remain soft in 2019 with the risks on the downside due to Brexit uncertainty and slower economic growth in Europe. Long-haul is likely to continue to offset negative pressure on short-haul yields for network carriers. Long-haul yields performed well across all regions except for Latin America in 1H19.

BA's 1H19 unit revenue demonstrated the strongest performance among its network peers and marginally outperformed our forecast. This was supported by the company's diversified route network and strong positions in North American destinations. BA's operating profit margin of 12% in 1H19 was comparable to that of ultra low-cost carriers Ryanair and Wizz Air and well above those of network carriers Lufthansa (1.9%) and Air France-KLM (0.7%), demonstrating the increasing disparity among peers.

Results among European low-cost carriers (LCCs) were also varied. Wizz Air reported the highest EBIT margin of 13.4% in 1Q (FY to March 20). Despite Ryanair's EBIT decline in 1QFY to Mar-20, its EBIT margin remained healthy at 11.9%, while easyJet's operating loss widened in 1H (FY to September 19). We believe Wizz Air's operations will continue to be supported by the company's strong market position in Central and Eastern Europe, where more dynamic economic growth and fewer per capita trips compared to western Europe provide good potential for passenger traffic growth. Ryanair's 1Q (FY to March 20) performance was affected by challenging market conditions in Germany, Brexit uncertainty, higher fuel and labour costs, and the consolidation of Lauda.

A decline in fare per passenger by 4% and 6% for Wizz Air and Ryanair, respectively, in 1Q (FY20 to March 20) was more than offset by an increase in ancillary revenue per passenger. Ryanair's guidance for FY to March 20 fare dynamics is towards the lower end of the range of minus 2% to +1%.

We expect LCCs to remain the key drivers of capacity growth in the European market. Ryanair expects its traffic to grow by 7% in FY to Mar-20, easyJet forecasts capacity growth of 10% in FY to September 19, while Wizz Air increased its capacity growth forecast to 20% for FY to March 20 from the previous estimate of 16%. The three largest network carriers plan to increase their overall capacity by 2-4% in 2019. Given Ryanair's and easyJet's scale and more mature stage of development, we expect these companies to focus on consolidating their market positions. They are more likely to be involved in M&A or transformational business opportunities (such as Ryanair's access to long-haul through its partnership with Aer Lingus). We expect Wizz Air to maintain higher organic growth rates.