The demise of Monarch, Air Berlin and Alitalia may have reduced competition in the European short-haul market but overcapacity and a weak pricing environment continue to weigh on many airlines.
READ: Ryanair warns of impact from further pilot strikes as it reports 20% drop in quarterly profits
The budget airline said it continues to see overcapacity in the European market, with Germany particularly price competitive this summer.
Sector peer easyJet PLC (LON:EZY) has taken advantage of the collapse of Air Berlin by snapping the carrier’s operations at Berlin Tegel Airport.
However, the acquisition is yet to provide a much of a boost to easyJet with the airline warning last week that the Tegel operations would generate a total loss of £175mln for the year and that revenue per seat is weaker than expected due to additional capacity in the Berlin market.
READ: easyJet shares lift off as it raises profit guidance despite impact of air traffic control strikes
Its strategy is to offset lower fares by keeping a tight control on costs.
Higher fuel and staff costs
But managing costs is becoming harder for many airlines as fuel and staff costs rise.
A recovery in oil prices has pushed up fuel costs while industrial action across Europe could result in further pay rises for airline staff.
Wizz Air, which publishes its first-quarter trading update on Wednesday, said fuel costs rose by 28% last year while staff costs increased 31%.
Ryanair’s staff costs rose by 34% in the first quarter after raising pay for pilots by 20% and pay for non-flight staff by 3%.
Irish-based pilots held two strikes in July and have threatened a third for Tuesday in a dispute with Ryanair over pay and conditions.
Meanwhile, strikes by French air traffic controllers (ATC) over staffing and rostering led to 2,500 flight cancellations in the quarter.
Russ Mould, investment director at AJ Bell, said the airline has a good job at making money from passengers beyond the price of an airline ticket.
Ryanair has suggested passengers load their own luggage, that some planes should remove one of the toilets to accommodate extra seats while it has also previously talked about offering event tickets, restaurant bookings and other travel-related services.
“Yet first-quarter results would suggest it needs to do more to cope with higher oil prices, higher pilot costs and yet another bout of strikes,” Mould said.
Similarly, easyJet said French ATC strikes had a “significant impact” on its operational performance in the third quarter. The industrial action and poor weather led to 2,606 flight cancellations, resulting in higher disruption costs.
Yet easyJet raised its profit guidance for the year as cost savings offset the impact of the strikes.
“We continue to recommend the shares as a ‘buy’ for medium risk investors as the company has good momentum with its trading, a relatively strong balance sheet and a number of opportunities for further growth, although the regular industrial action in France is clearly hampering progress,” said Ian Forrest, investment research analyst at The Share Centre.
British Airways owner International Consolidated Airlines (IAG) revealed in May that fuel unit costs rose just 0.6% and employee costs were up 0.2% in the first quarter.
However, analysts at Barclays expect the disruption from ATC strikes will have hurt IAG, particularly its Vueling airline, in the second quarter.
Nevertheless, Barclays said IAG remains its preferred stock in the sector and has an ‘overweight’ rating on the airline.
Risk of a 'hard' or 'no deal' Brexit
Brexit is another challenge facing airlines operating across the European Union.
To protect their flying rights, Wizz Air, easyJet and Ryanair have been making changes and applying for new licences.
IAG boss Willie Walsh has said he is confident a deal will be done to secure Britain’s flying rights after Brexit.
“I am a firm believer that this will get resolved,” Walsh said at the Airlines For Europe conference in March.
But he may be too complacent since Prime Minister Theresa May is yet to secure a deal with the European Union and the deadline is drawing nearer.
Rebecca O’Keeffe, head of investment at Interactive Investor, said: "With May’s government somewhere between a hard Brexit and no deal, it will be very difficult for Europe to sign off on any deal based on the current UK confusion.
"The summer recess may provide some respite, but as the weeks tick by the prospect of no deal is rising rapidly and the impact on sterling could become more severe than it already is, and international companies may once again begin to rachet up the rhetoric regarding the very real risks of a bad deal."