Easyjet To Benefit As Gatwick Forces Slashed Flight Numbers

Easyjet (LON: EZJ) shares may well be the main beneficiary of the plans announced by Gatwick to force slashed flight numbers from the airport this summer. This could even sound a little perverse given that it's the airport insisting the airline limit the amount of business it does but it is still true – it depends upon a little trick of airline economics.

The plan is that Gatwick is insisting that the airlines cancel some 4,000 flights this summer: “It is clear that during the Jubilee week a number of companies operating at the airport struggled in particular, because of staff shortages. ” That's the real reason – it's just not possible to expand capacity as fast as demand is rising. So, to avoid chaos, forcibly limit the expanded capacity.

Now, this means the most to Easyjet. Ryanair is mostly Stanstead these days, IAG (ie, BA) is more Heathrow, Wizz is at Gatwick, but even the UK isn't their main market, let alone one airport. This will have the biggest impact upon EZJ. But what is that impact? We could say that this will mean flights that could have been had now can't be – that's a loss of revenue. That's bad for the Easyjet share price.

Also Read: IAG Continues to Fall, But the Fundamentals Are Improving

But think a little more about airline economics. The cost of running a light is pretty much a fixed cost. Every passenger is revenue, though. And full planes mean both higher revenues per passenger (ticket prices rise, naturally enough) and also more passengers per flight. This all feeds through directly to the bottom line, the profits.

Effectively, Gatwick is forcing Easyjet to limit capacity this summer. That will increase both passenger loads and ticket prices – that will push up Easyjet profits. In fact, this is what a monopolist airline would try to engineer on its own, what a cartel would illegally try to do – limit capacity to force up prices. The grand joy here comes as it's the airport doing the insisting, wholly legally and also for good reason – the effect on the airline profits is the same though.

Easyjet, more than the other UK domestic airlines, is being told to limit its carrying capacity through Gatwick this summer. This will increase the load factors and ticket prices, thereby benefitting EZJ profits. That's the initial analysis of this action of course.

What then matters for the Easyjet share price is how much will this affect matters. And the truth is it could be quite a lot. For such airline pricing and passenger loads, they all operate at the margins. The loss of 2% (just to entirely invent a number) of flights could lead to a very much more than 2% rise in ticket prices on remaining flights. But of course the costs of operating those flights will not change at all – so the change to profits could be very much larger than merely 2%. That then needxs to be discounted by how much of the total business runs through Gatwick of course.

But it is still true. Gatwick imposing limitations on flight numbers this summer is likely to boost Easyjet profits.