10-Aug-2014 11:57 PM

Brussels Airlines reduces its losses, but yields fall as Ryanair and Vueling enter its Brussels hub

Analysis

In 2013, Brussels Airlines narrowed its losses, mainly as a result of cost reduction, with labour productivity making real improvements. However, unit revenues fell last year reflecting a soft market environment.

Downward pressure on pricing looks likely to intensify in 2014: Brussels Airlines is accelerating its capacity growth, particularly on its long-haul (African) network, and its hub has seen the entry of LCCs Vueling and Ryanair. Its previous target of returning to profit in 2014 may now be in doubt.

Meanwhile (and as predicted by CAPA), Lufthansa allowed its call option over the 55% of Brussels Airlines that it does not already own to lapse in Apr-2014.

Summary

Brussels Airlines' passenger numbers increased by 2% to 5.9 million in 2013, reaching pre-financial crisis levels.
The airline's passenger growth rate has accelerated in 2014, with a 10% increase in the first six months, driven by long-haul routes.
Brussels Airlines is facing increased competition from low-cost carriers (LCCs) at its hub in Brussels, with its market share falling to 29%.
LCCs now account for 39% of all international seats in Belgium, up from 17% before the financial crisis in 2007.
Brussels Airlines has introduced a new commercial strategy, adopting a hybrid model that combines elements of both LCC and full-service carrier models.
The airline's fleet is ageing, with an average age of 13.7 years, and its cost per available seat kilometer (CASK) is higher than competing LCCs.

2013 passenger numbers regained pre-crisis levels, but load factor low by industry standards

In 2013, Brussels Airlines' passenger numbers increased by 2% to 5.9 million, finally taking them back to their pre-financial crisis level of 2007. Passenger load factor gained 0.4 ppts to 69.1%, which was more than 2.5 ppts up on the 2011 level.

However, this load factor still looked low by comparison with the roughly 80% industry average, offering significant scope for improvement.

Brussels Airlines passenger numbers (million, left hand axis) and passenger load factor (%, right hand axis)

Traffic growth accelerates into 2014, driven by long-haul

This year, the airline's passenger growth rate has accelerated. In the first six months of 2014, Brussels Airlines (hereafter referred to by its IATA code 'SN') recorded a 10% increase in passenger numbers to 3.1 million. This growth has mainly been driven by long-haul, where the rate of increase has been comfortably higher than 10%.

SN's 1H2014 passenger load factor gained 1.6 ppts to 69%. Although this increase is to be welcomed, the load factor remains well short of the industry average and a long way below the LCCs that are increasingly competing with SN.

According to a press release from Brussels Airlines in early 2014, it will operate 2,486 additional flights and 400,000 additional seats this summer by comparison with summer 2013.

On its European network, it has a total of 51 destinations (week of 4-Aug-2014, source: OAG), including 11 newly launched this summer: Alicante, Athens, Bari, Bastia, Cagliari, Figari, Krakow, Malta, Montpellier, Seville and Warsaw. It also added frequencies on routes such as Catania, Faro, Florence, Lisbon, Madrid, Malaga, Marseille, Palermo, Marrakech and Stockholm Bromma and reopened Porto as a summer route.

Outside Europe, SN has 19 destinations in Africa, two in North America (JFK and Dulles) and one in the Middle East (Tel Aviv). On Luanda (Angola) and Bujumbura (Burundi), it increased the number of weekly flights to three from two and added a fifth weekly flight to Nairobi (Kenya).

SN's charter activity focuses on Mediterranean destinations on behalf of Belgian and other tour operators, its largest customers being Thomas Cook and Club Med. It also offers holiday flights from French and Swiss airports. In total, 1,044 holiday flights were planned for this summer season.

SN is losing market share in Brussels as Vueling and Ryanair enter its hub

SN's growth in 2014 is, in part, a response to an attack on the core of its business at its Brussels hub. Following the entry of LCCs Vueling and Ryanair into the main Brussels airport this summer, SN's share of seats at the airport has fallen to 29% for the week of 4-Aug-2014, from 36% in summer 2013 (sources: OAG and Innovata).

Ryanair now has 6% and Vueling 4% of seats at Brussels Airport. SN's share is by some distance the lowest of any 'national' carrier in Western Europe at its home hub.

Brussels Airport capacity by seats: 4-Aug-2014 to 10-Aug-2014

Moreover, if Brussels South Charleroi Airport is also taken into account, SN's share of seats in the Brussels airport system is only 23%. Ryanair has been well established at Charleroi and has almost the same number of seats at Brussels' number two airport as SN has at the main airport. Ryanair's entry into Brussels Airport means that it now matches SN's seat capacity in the Brussels system as a whole.

LCC Jetairfly, a TUI Travel subsidiary, is also present at both airports with a 10% overall share. LCCs Vueling, easyJet and Wizz Air have 8% of Brussels system seats between them. The two Brussels airports account for around 98% of Belgium's seat capacity, and so these figures for market share in the Brussels system broadly reflect market share in the country as a whole.

Combined seat capacity by airline at Brussels Airport and Brussels South Charleroi Airport: 4-Aug-2014 to 10-Aug-2014

LCC competition is intensifying: 38 out of 51 European city pairs

LCCs now (Jan-Aug 2014) account for 39% of all international seats in Belgium, up from 17% before the global financial crisis in 2007.

Belgium LCC Capacity Share (%) of Total Seats: 2001 - 2014*

Out of SN's 51 European destinations, it now has LCC competitors on 38 (based on city pairs), according to our analysis of schedules data from OAG for the week of 4-Aug-2014. Moreover, the LCC competition includes three of Europe's four biggest LCCs (Ryanair, easyJet and Vueling) and SN frequently faces more than one LCC competitor on the same city pair.

Ryanair now operates 11 routes from Brussels Airport. It competes with Brussels Airlines on eight of these and it also competes with SN on 29 city pairs from Brussels South Charleroi, six of which Ryanair serves from both Brussels airports. The number of unique city pairs served by both Ryanair and Brussels Airlines is 30.

Vueling also operates 11 routes from Brussels Airport, competing with SN on seven of these. SN goes head to head with easyJet on eight city pairs. Jetairfly competes with SN on four city pairs and Wizz Air on two, both of these two LCCs operating from Charleroi.

Brussels Airlines routes with LCC competition on the city pair

Destination	Ryanair BRU*	Ryanair CRL*	Vueling	Wizz Air CRL*	easyJet	Jatairfly CRL*	airBaltic
Agadir		x
Alicante	x	x	x			x
Athens	x
Barcelona El Prat	x	x	x
Bari		x
Berlin Tegel					Schoenefeld
Bologna		x
Budapest Liszt		x		x
Cagliari		x
Edinburgh		x
Faro		x
Figari		x
Geneva					x
Krakow		x
Lisbon	x		x
London Heathrow					Gatwick
Lyon					x
Madrid		x
Malaga	x	x	x			x
Manchester		x
Marrakesh		x
Marseille		x
Milan Malpensa & Linate		Bergamo			Malpensa
Montpellier		x
Naples					x
Nice					x	x
Oslo		Rygge
Porto	x	x	x
Prague		x				x
Riga		x					x
Rome Fiumicino	x	Ciampino	x
Seville		x
Stockholm Bromma		Skavsta
Toulouse					x
Turin		x
Venice Marco Polo	Treviso	Treviso	x
Vilnius		x
Warsaw Chopin		Modlin		x

New commercial strategy following a year of research

Ongoing pressure from LCC competition has forced SN to unveil a new commercial strategy. On 15-Jul-2014, it announced changes to its product and pricing, signalling a more concerted embracing of the so-called 'hybrid' model.

This approach attempts to combine elements of both the LCC and the FSC models, based on market segmentation and price discrimination. It adopts an 'unbundling' policy on pricing, charging separately for different elements of the service if passengers do not want an all inclusive ticket, while still offering a bundled service to those who are prepared to pay.

In the case of Brussels Airlines, it will (from 1-Sep-2014) offer four products, or fare categories, named check&go, light&relax, flex&fast and biz&class. These four replace its previous three ticket types, which were b.light economy, b.flex economy+, and b.business

Check&go, with return fares starting at EUR69, is the most basic no-frills seat only service. Light&relax, starting at EUR109, includes a checked bag, seat reservation and ticket modification. Flex&fast offers priority check-in, fast lane security, seats at the front of the cabin and on-board catering. Biz&class is SN's premium product, offering lounge access, superior catering, a more generous baggage allowance and a free middle seat.

SN, which has also introduced a new slogan ("We go the extra smile") said that its four new products were the result of a year of research. It also plans to launch a new frequent flyer programme by the end of 2014.

The company's statement announcing the changes said that "Brussels Airlines positions itself as a hybrid airline which offers a high value for money solution for all market segments and budgets, without having to compromise".

Offering four fare categories instead of three does increase its ability to segment the market, but it is difficult to see how SN is fundamentally differently positioned compared to previously.

Brussels Airlines' transition to a hybrid carrier is compatible with parent Deutsche Lufthansa AG's plans to amalgamate its European point-to-point services under the 'WINGS' brand, according to CCO Lars Redeligx (Het Laatste Nieuws, 15-Jul-2014). Mr Redeligx said: "What we are doing is perfectly in line with WINGS. We have implemented the core elements of it already. There is no other airline in Brussels to compete with us."

Brussels Airlines fleet is ageing

Since our last CAPA Analysis report on Brussels Airlines in late Jun-2013, its fleet has grown by a net two aircraft to 46 as at 8-Aug-2014. The fleet and the changes since then are summarised in the table below.

According to the CAPA Fleet Database, the average age of the fleet is 13.7 years, older than the global and European averages and considerably older than the fleets of most European LCCs. Its widebody fleet of eight A330s has an average age of 18.5 years, although SN completed a cabin upgrade last year.

Brussels Airlines Fleet Summary : as at 8-Aug-2014

Aircraft	In Service	Difference vs 27-Jun-2014
Airbus A319-100	16	+2
Airbus A320-200	6	+1
Airbus A330-200	3	+1
Airbus A330-300	5	0
Bombardier DHC-8Q-402	3	-2
British Aerospace BAE146-RJ100	12	0
British Aerospace BAE146-RJ85	1	0
Total:	46	+2

Losses narrowed in 2013 as CASK fell faster than RASK

In 2013, Brussels Airlines continued to be loss-making, although it managed to reduce its operating loss by 69% to EUR28 million. Revenues were up 2.2%, in line with passenger growth but slower than ASK growth, while costs fell by 3%.

In spite of a 4% increase in average trip length, driven by long-haul expansion, revenue per passenger was only just better than flat at EUR194. This illustrates pricing pressure in SN's markets and is further highlighted by a 3% fall in total revenue per ASK (RASK).

The operating loss was narrowed in 2013 because cost per ASK (CASK) fell at the faster rate of 8%. SN's relatively low passenger load factor offers scope to increase RASK and revenues, if it can maintain yields, without a commensurate increase in CASK and costs.

Brussels Airlines financial and operating highlights: 2011 to 2013

EUR million except where stated	2011	2012	2013	Change 2013 vs 2012
Revenues	1,036	1,113	1,138	2.2%
Operating profit	-87	-92	-28	-69.3%
Operating margin	-8.4	-8.2	-2.5	+5.8 ppts
Net profit	-80	-61	-22	-63.8%
Gross debt	-	95	72	-24.7%
Cash & short term investments	173	135	126	-7.2%
Net debt/(cash)	-173	-40	-54	34.2%
Equity	50	14	17	21.3%
ASK million	12,755	13,436	14,142	5.3%

Passenger load factor %	66.5	68.7	69.1	+0.4 ppts
Pax m	5.69	5.76	5.88	2.1%
RASK EUR cent	8.13	8.29	8.05	-2.9%
CASK EUR cent	8.81	8.97	8.25	-8.1%
Rev per pax EUR	182	193	194	0.1%
Cost per pax EUR	197	209	198	-5.2%

'Beyond 2012-2013' lowers costs, with labour productivity improving

This reduction in CASK reflects efforts by management to reduce costs under its performance improvement plan 'Beyond 2012-2013', which aims for a EUR100 million cost reduction. In particular, labour costs fell by 7% in 2013 and all measures of labour productivity improved, including a 9% fall in employee costs per passenger (see table below).

Brussels Airlines labour cost and productivity: 2011 to 2013

	2011	2012	2013	Change 2013 vs 2012
Average headcount (consolidated)	2,418	2,479	2,393	-3.5%
Labour costs EUR million	180	189	176	-6.9%
Labour costs as % of revenue	17.3	17.0	15.4	-1.5
Labour cost per employee EUR	74,362	76,191	73,470	-3.6%
Pax/employee	2,353	2,323	2,457	5.8%
Employee cost/pax EUR	31.6	32.8	29.9	-8.8%

But SN's CASK is still much higher than competing LCCs'

SN's 2013 CASK of EUR8.25 cents puts among the more cost efficient European 'flag carriers', taking account of its average trip length. However, it is more than twice the CASK of Ryanair and Wizz Air and roughly 40% higher than that of Vueling and easyJet. It has a longer average trip length than these LCCs, which (all other things being equal) ought to give it a lower CASK.

SN's check&go product, with fares starting at EUR69, is clearly aimed at competing with LCCs, but it is unlikely to be profitable at that fare. Ryanair and Wizz Air have average costs per passenger of less than EUR60, while cost per passenger for Vueling and easyJet is in the mid EUR70s and SN's short-haul cost per passenger must surely be considerably higher than EUR69.

Of course, EUR69 is only the starting fare and check&go is only the entry level product, but this highlights that SN will not be able to compete with LCCs on price. Further reductions in its losses (and a return to profit) will consequently continue to depend on cost reductions and, on the revenue side of the equation, on the perceived quality of its service and product/network.

The latter includes its African route network, in particular Central/Western Africa, where SN is the number two airline from Western Europe (behind Air France). As CAPA said in Jun-2013, however, Africa provides SN with an interesting niche, but this looks vulnerable to rapidly growing competitors and those that also offer more global destinations to African passengers. Moreover, Europe accounts for more than 80% of SN's seats (week of 4-Aug-2014, source: OAG) and so the battle with LCCs remains crucial.

See related reports:

Brussels Airlines' less certain future - improvements but not profits

When SN launched its 'Beyond 2012-2013' programme in late 2011, its aim was to return the company to profit by 2014. Tellingly, perhaps, its Mar-2014 announcement of 2013 results only said that it expected "a further improvement in operating results in 2014".

This leaves open the possibility that it might not achieve a profit this year, although it would not be the only European FSC to see its targets slip. Competition has increased since the programme was launched and this has put pressure on revenues.

Lufthansa acquired its 45% stake in SN in 2009 and had an option to buy the remainder from 2011 until it lapsed in Apr-2014. Its decision not to acquire the remaining 55% of SN does not signal that Lufthansa has no strategic interest in it: indeed, there has been considerable cooperation, including codeshare agreements, FFP integration and a project to optimise neighbourhood traffic between Brussels and other Lufthansa Group hubs.

Nevertheless, with LCC competition intensifying and financial results still far from sustainable profits, the future for Brussels Airlines is a little less certain than it was when it still had the prospect of becoming a fully fledged Lufthansa subsidiary.