Easy rising

EasyJet's brio bodes ill for Lufthansa, Air France

EasyJet is further tightening the screws on stricken high-cost rivals. While Air France employees clashed physically with top management in October, and Lufthansa flights are prone to grounding by striking pilots and cabin staff, the British low-cost rival is going from strength to strength.

EasyJet unveiled an 18 per cent jump in full-year pre-tax profit for 2015. Europe's second-largest low-cost carrier by passengers also said it was ordering 36 additional aircraft. It wants to step up growth in 2016 and beyond.

Chief Executive Carolyn McCall's confidence is well placed. Europe's high-cost legacy carriers, which still control 58 per cent of the short-haul market, are easy prey for the nimble low-cost carrier. Lufthansa, Air France and Alitalia have operating costs per-seat-flown 25 per cent and more above the no-frills crew. Okay, so the old guard is trying to cut costs and follow the low-cost example. But while they are still trying rather than succeeding, they miss out on at least some of the gain to be had from the five per cent annual growth in European demand for short-haul flights.
 

Sure, easyJet's accelerated ambitions carry risk. As other rivals expand, the industry may create overcapacity. But easyJet's management has a good track record of delivering profitable growth. In the year ended in September, the number of passengers flown grew six per cent while the pre-tax profit margin increased 1.8 percentage points to 14.6 per cent. Cheaper oil prices helped, but accounted for less than half of the rise in pre-tax profit. Other factors beyond management's control, such as higher airport fees and costs arising from striking air traffic controllers, did the reverse.

Much of easyJet's quality is already priced into the shares. They are up 11 per cent over the last 12 months, while the FTSE 100 index has lost six per cent in the same period. The stock trades at 12 times the next 12 months' earnings per share - a 45 per cent premium to the wider European airlines industry, Thomson Reuters Eikon data shows. That leaves McCall with a narrow margin for error - despite the width of the positive performance gap beside peers.