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Whether we like it or not, airlines are always selling more. Buying a larger suitcase or a guaranteed seat is common when booking a flight. These added extras already make up a decent chunk of many airlines’ revenue (almost a third at Ryanair, for example). But other, lesser-known non-core activities are becoming important profit generators for some European airlines.
EasyJet’s holiday business, relaunched in 2019, is a case in point. The holidays division’s pre-tax profit rose 56 per cent in the year to September to £190m, representing 31 per cent of the group’s total. Another example: the loyalty business of International Airlines Group, owner of British Airways and Iberia, generated a higher operating profit in 2023 than its Irish airline Aer Lingus.
It’s easy to see why they’re both interested in these side jobs. EasyJet’s holiday business is asset-light and risk-free. Negotiate directly with hotels to secure discounted rates. Hotels assure easyJet of a certain allocation of rooms, but if those rooms are not sold, easyJet does not bear any penalty.
The argument is that hoteliers’ properties are marketed to passengers of one of the largest, if not the largest, airlines serving their location. In easyJet’s 2024 financial year, the holiday business served 2.6 million customers. The airline transported 89.7 million. Not all passengers on a flight will need to purchase accommodation. Still, there is much more room for growth. “It’s about capturing the spend that’s happening anyway and moving it to easyJet,” says Panmure Liberum’s Gerald Khoo.
Indeed, if the holiday business achieves even half the profit growth in 2025 as in 2024, that would already bring EasyJet closer to the “medium-term” pre-tax profit target of £250m for the division, set on last year.
IAG chief executive Luis Gallego has also made the growth of IAG Loyalty, which houses both its Avios loyalty points program and its BA holidays, a key pillar of its strategy. No wonder: it requires little capital expenditure compared to the airlines’ core business. It also has better operating profit margins (21.7 per cent in 2023) than any of IAG’s airlines (BA’s operating margin last year was 10 per cent).
Avios can also provide cash at any time of the year. Partners like Credit card issuers pay IAG for their Avios points that their own customers can collect when they spend with them.
These are non-core activities that investors should expect to firmly enter the mainstream, especially at a time when valuations are still suppressed by fears that the post-pandemic increase in ticket prices It’s over. A better combination of benefits should contribute to a softer landing.