On Friday, almost five months after Air Berlin said it would shut down amid mounting losses, Easyjet launched its first domestic German route, flying from Berlin to Munich. It’s one of 19 new short-haul routes Easyjet soon plans to start from Tegel, Berlin’s largest airport. And while most will be to other European countries, four will be within Germany — from Tegel to Düsseldorf, Frankfurt, and Stuttgart, along with Munich.
EasyJet finalized plans to buy pieces of Air Berlin last month, paying about 40 million Euros ($48.2 million), allowing it to take over leases on 25 Air Berlin aircraft and acquire many of its assets at Berlin Tegel. After the expansion, Easyjet said it will fly about 18 million passengers per year to and from Germany. According to the airline, one in five Easyjet customers will start or end their journey in Germany this year.
Easyjet’s German expansion should change the market. While Air Berlin had been flying many of the same routes, with the same planes, the airline in recent years was not much of a competitor to Lufthansa. Its costs were considerably higher than Easyjet’s, and it often reinvented itself, sometimes by focusing on leisure travelers, and other times by going for business customers.
Neither strategy worked, and eventually Air Berlin’s main financial backer, Abu Dhabi’s Etihad Airways, stopped funding it. Easyjet and Lufthansa bought many of its pieces.
With its share of Air Berlin’s assets, Easyjet will change how it operates in Germany. In the past, EasyJet focused on Berlin’s Schönefeld Airport, a popular facility for low-cost airlines serving leisure travelers.
But now, it will enter the business market, making a play for corporate travelers in Germany and elsewhere. From Tegel, it will fly as much as five times a day to key business cities like Vienna and Zurich.
Easyjet should be better positioned to compete with Lufthansa, which dominates the short-haul market from Germany. Lufthansa has in the past been insulated from some low-cost competition, but with Easyjet and Ryanair adding flights — the Irish discounter is growing organically, promising to at least double its share of the German market by 2020 — Lufthansa will have to fight to maintain its market position.
Cost Effective Growth
In a recent report, analyst Gerald Khoo of Liberum credited Easyjet for its strategy, calling the Berlin expansion a cost effective way to grow in a massive market.
In addition to the acquisition costs, Easyjet has calculated it will pay about £100 million ($135.6 million) in start-up costs, including pilot retraining and aircraft re-registration, while taking a short-term £60 million ($81.4 million) loss related to ramp-up costs from the transaction. Easyjet has said it expects the deal will add to the company’s value by 2019.
“Easyjet’s agreement with the administrators of Air Berlin has seen it acquire a leading position in the growing and attractive Berlin market for an upfront outlay of less than £200m,” Khoo said.
In another report, from Bernstein, analyst Daniel Röska noted Easyjet’s expansion in Berlin is part of what he calls a “Castles and Moats” strategy. Instead of competing everywhere, Röska said, Easyjet builds pockets of strength, “effectively making the product more attractive for business travelers, increasing pricing power and blocking out further competitive entry.”
By this summer, Röska estimated Easyjet will have about 38 percent share in Berlin, more than Lufthansa Group (29 percent) and Ryanair (13 percent).
“While still below the optimal level of 45 percent capacity share Easyjet achieves in other bases, and spread over two airports, we think this position will be hard to undue by other low cost rivals such as Ryanair,” he said.
Source: SKIFT || Jan 5, 2018 |||