EasyJet is turning improved customer service into bundles of cash. The numbers are especially impressive in the context of the millions being lost by many of Europe’s legacy airlines on short-haul flights. It also makes a stark contrast with the low-cost rival Ryanair, which has issued two profit warnings since September.
At easyJet, pretax profit jumped by 51 percent in the year to Sept. 30. It raised its dividend by 56 percent and declared a special distribution that was larger than the total ordinary payout. Over the last 12 months, shares in Europe’s second-largest low-cost airline have doubled, mirroring improvements in its operational performance. Stock rose another 7.5 percent on Nov. 19.
CEO Carolyn McCall, who joined in 2010 as an aviation novice, has got many things right. She moved the airline’s customer service standards up without adding unduly to costs. In the last three years, punctuality has improved by a third largely because it has left more time in the schedule to turn flights around. Premium fares that allow flexible rebooking have helped to woo business customers, but McCall’s boldest move has been to introduce allocated seating. This has made boarding less stressful and increased customer satisfaction. It has also driven up ancillary revenue because more passengers are willing to pay a fee for being able to choose preferred seats.
Future growth, however, may be harder to achieve. EasyJet has been helped by the capacity cuts made by rivals. If demand now improves, capacity may increase and competition for passengers get tougher. Lufthansa’s revamped low-cost subsidiary Germanwings is shaping up as a force to be reckoned with, while Spanish rival Vueling is expanding fast. Rivals are also copying easyJet’s move on service standards. Ryanair will offer allocated seating in early 2014. Meanwhile, and despite its challenges, easyJet’s Irish rival still earns a 25 percent higher net profit margin.
Thomson Reuters Starmine data indicates that the British carrier currently trades at a forward price-earnings ratio of 12. That is above the industry’s average and roughly at par with Ryanair. Further earnings growth should lead to further share price growth. But having climbed rapidly, easyJet may have now reached cruising altitude.