EasyJet's Smooth Flight Plan

The carrier, which just released a healthy earnings statement, is becoming the preferred low-cost alternative for travel to France and Spain

It's easy to overlook easyJet (EZJ). As Europe's No. 2 discount airline, it's often overshadowed by pugnacious, price-slashing No. 1 Ryanair (RYAAY). And it can't match the name recognition of flag carriers such as Air France (AKH) and British Airways (BAY.L).

But easyJet's flight plan is clearly working. Pretax profits are expected to rise nearly 50% for the fiscal year ended Sept. 30, on sales up an estimated 11% to $3.66 billion. The London-based airline carried 37.2 million passengers during the past 12 months, up 13%. Defying earlier worries (BusinessWeek.com, 5/11/07) about a turbulent summer, easyJet "achieved significant improvement in margins, despite the doubling of air passenger duty in the U.K. and record fuel prices," Chief Executive Andrew Harrison said in releasing earnings projections Oct. 8.

At the same time, easyJet is poised for a growth spurt in France—Europe's most visited country but one that has been difficult for low-cost carriers to penetrate. In early 2008, it will greatly expand service at Paris' Charles de Gaulle International Airport, while opening a new hub in Lyon, France's second-largest city. A total of 13 new routes, serving such destinations as Venice, Hamburg, and Lisbon, will take direct aim at dominant carrier Air France.

The Fighting Irish

Certainly, Dublin's Ryanair is thriving, too. Passenger numbers were up 18% during the quarter ended July 31, to 12.6 million. Profits during the quarter rose 20% to $197 million, on sales up 22% to $982 million. And Ryanair has the richest operating margins (BusinessWeek.com, 11/16/06) of any European carrier—some 18%, compared to less than 10% at easyJet.

But Ryanair may not have much more room to improve efficiency. It's already notoriously chintzy, flying to remote regional airports where landing fees are rock-bottom, and furnishing its aircraft cabins with thinly upholstered benches rather than seats. Ryanair even ran afoul of British disability-rights laws when it tried to charge handicapped passengers for wheelchair use.

EasyJet, by comparison, may have greater upside because it attracts more than just fliers seeking the lowest possible price. "EasyJet's prospects for earnings growth and margin growth are better than Ryanair's," says Chris Avery, a London-based aviation analyst with JPMorgan Chase (JPM). "The stock remains our pick of the sector." Shares are up almost 20% over the past year, though Ryanair's have risen an even greater 48%.

Business or Pleasure?

Compared to its Irish rival, flying on easyJet is almost luxurious—even though, as with most discount carriers, passengers have to pay for food and drink, and are herded rapidly on and off planes to minimize wasted time on the ground. EasyJet mainly flies to big-city airports, with two or three flights a day on some routes, making it a feasible choice even for business travelers.

Nicholas Fouilleroux, a concert producer waiting for an easyJet flight at Paris' Orly airport, says he stopped booking Ryanair tickets for his musicians because they had to trek out to an airport in Beauvais, a town some 50 miles away. "Beauvais is so far, flights are often canceled, and the customer service is very bad," he says.

Grabbing more business travelers could be a big boost to easyJet's margins. Currently, the typical easyJet flight carries 133 passengers paying an average of $87. JPMorgan's Avery reckons that if the airline could attract just two late-booking business travelers per flight, each paying about $346, the margin on the flight would rise by 3%.

Spain is another bright spot for easyJet. Like Ryanair, the airline is heavily used by British vacationers flying to Spain, says Daniel Solon, a Barcelona-based aviation analyst with consultancy Avmark International. But unlike Ryanair, it flies to Barcelona. And, says Solon, "easyJet treats its passengers rather well. No one could ever accuse Ryanair of that."

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