What's going on?
Low-cost airline EasyJet’s stock jumped 5% on Tuesday as it said it expects to benefit from the collapse of several of its competitors and problems at Ryanair. It’s survival of the fittest in the ultra-competitive European airline market! (tweet this)
What does this mean?
EasyJet’s profits declined almost 20% versus last year and it decreased its dividend. Usually that goes down like a cup of cold sick! But for investors, this set of results was all about EasyJet’s outlook for next year: the company predicted revenue-per-seat (an important industry measure) would increase in 2018 more than it previously thought. It’s still not a high-growth environment – EasyJet foresees growth of “a low- to mid-single-digit percentage” – but that’s much better than recent years.
Why should I care?
For markets: EasyJet is benefiting from Darwinism.
EasyJet is in the process of buying 25 aircraft from Air Berlin, as well as landing slots, and it may also purchase parts of Italian airline Alitalia. Both of these rivals went bankrupt earlier this year, along with Britain’s Monarch Airlines. The acquisitions should help EasyJet get even bigger in the coming years. More broadly, EasyJet (and others) will benefit from the reduced competition, meaning it will be easier to increase fares – and boost revenue.
The bigger picture: This is how free markets are supposed to work.
In theory, free markets create a natural balance between supply and demand. In recent years, there have been too many European domestic airlines flying too many flights. Fares were forced down due to the competition for customers, hitting airlines’ profits. The situation was, ultimately, unsustainable – and the weaker companies have succumbed to bankruptcy. There are certainly downsides: your fares may go up and some workers will lose their jobs. But the industry is finding a sustainable future for customers, employees and shareholders alike – and that’s capitalism for you.