(Finance) – After a strong post-pandemic recovery, airlines in North America and Europe have faced various challenges, including rising operating costs, geopolitical issues, delays in aircraft deliveries Airbus And Boeing and weakening pricing power. Many airlines are therefore struggling to keep up with the strong performances they recorded in 2023. The low cost companies (low-cost carriers, LCC) in general are coming under more pressure than their full-service carrier counterparts (full-service carrier, FSC); some LCCs have filed for bankruptcy, while some of the more established LCCs have reported a material deterioration in profits, Morningstar DBRS notes in a report on the topic.
In the United States and Europe, the operating profits of the second trimester of 2024 of some LCCs have decreased more substantially than those of FSCs (Southwest -50%, Ryanair -49%). “We see several challenges facing LCCs, including structural challenges in some markets andweakening of pricing power resulting from slowing global consumer spending coupled with high operating costs – the report states – Additionally, FSCs are benefiting from some consumers willing to spend more post-pandemic for features such as premium economy that are not common with LCCs. We expect these challenges to continue in the near term, with a gradual improvement expected from 2025 onwards”.
Morningstar DBRS notes that LCCs generally have weaker pricing power than full-service carriers (FSCs) due to an inherently cost-conscious customer base. Strong pent-up demand post-pandemic has allowed all airlines globally, including LCCs, to enjoy healthy passenger returns along with elevated load factors in 2023. However, this has started to change in 2024. operating costs have increased substantiallyespecially labor costs. In addition, demand has normalized along with global macroeconomic challenges that impact consumer spending power.
“While these factors are affecting all airlines, LCCs are feeling the effects more than FSCs – it is underlined – This is because their customers are demonstrating greater elasticity of demand and also because LCCs have to operate with higher load factors to maintain profitability. The result is a increased competition and price constraints“.
In its recent results, Ryanair highlighted that while the traffic continued to grow (up 10%), the average airfare was lower 15% from last year and the company expects the trend to continue at least into the next quarter. In the United States, Southwest, JetBlue, Spirit And Allegiant they are all in difficulty compared to United, Delta And American. In Europe, Ryanair witnessed relatively higher operating income compression between April and June 2024 compared to FSC as Air France – KLM, IAG And Lufthansa.