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All is not well in Air France-KLM. The group has reported another decline in quarterly profits. Its 2Q2015 operating result was down by 2% and insufficient to bring 1H2014 into positive territory after an operating loss in 1Q2015. Currency movements, specifically the weaker EUR versus USD, had the effect of inflating both revenue and costs, but the net impact accounted for the deterioration in the operating result.
Nevertheless, this should not detract from Air France-KLM's very weak unit revenues, which appear immune to attempts at improving the product and may only respond to capacity cuts. Either way, unit cost reduction will remain crucial if the group is to return to a sustainable profit path. Long haul routes in particular are under threat.
The development of its medium haul low cost airline, Transavia, continues to be rapid in France, but the scale and profitability of this operation are weak compared with Europe's leading LCCs. However, the establishment of Transavia Europe, with bases beyond France and the Netherlands, could be back on the agenda after a change in leadership at the French pilot union.
EasyJet: 3Q update signals another year of solid profit growth in spite of lower on time performance
EasyJet's 3Q update sent its share price up by 4% as investors cheered its better than expected revenue per seat performance, reflecting strength in the UK and on beach routes across Europe. Although this measure fell year on year - partly as a result of currency movements, but also illustrating some pricing weakness - the decline was less than expected. Moreover, the 4Q trend now appears to be positive.
Cost per seat, excluding currency movements, was slightly higher than expected, but this was the result of flight disruption caused by third parties, particularly French ATC strikes. Apart from this, there do not appear to be any cost surprises. One area of concern is easyJet's deteriorating on time performance statistics, although management insists that this is now improving.
Overall, and in spite of some challenges in the operational and macro environment, easyJet is in a relatively confident mood. Its FY2015 guidance sees pre-tax profit growth of around 10%, slower than the 21% achieved in FY2014, but still a solid performance.
Setting aside the impact of a provision for possible claims related to historic flight delays, the Dart Group increased its underlying operating profit by 3% in FY2015. This was driven by its leisure travel segment, which now aggregates its leisure airline Jet2.com and its package holidays business Jet2holidays.com and accounted for almost all of the group's profit.
However, operating margin slipped slightly, both for the group and the leisure travel segment, as costs grew a little faster than revenue. It is no longer possible to ascertain whether the causes of this lay with the airline or the package holidays business (or both), since they no longer report separate results.
We do know that the holidays business has grown in importance to the airline and supplied one third of its passengers in FY2015. Jet2.com is one of Europe's most seasonal airlines, with a seasonal peak weekly seat capacity (Jul-2015) nine times that of its lowest weekly seat capacity (Jan-2015, source: OAG). This strong summer leisure focus risks means that the airline and the group have a lot of their eggs in the same basket.
After forecasting a return to profit for FY2015 in Jan-2015, the Monarch Group reported narrower losses for 1H2015 (Nov-2014 to Apr-2015). This indicates progress with its restructuring programme, although the very seasonal pattern of its business means 2H2015 will be crucial.
Monarch Group has not yet published its FY2014 annual report, but CAPA has examined its FY2014 accounts, recently filed with the UK Registrar of Companies. These reveal a heavy loss in FY2014, mainly due to the Group's airline. Monarch Airlines grew too rapidly and suffered both from a fall in unit revenue and an increase in unit cost. Moreover, the Group almost ran out of cash.
In 1H2015, capacity was cut, slowing the fall in unit revenue. Moreover, unit cost fell, partly due to lower fuel prices, but also thanks to the restructuring programme. The sale of the Group towards the end of Oct-2014 brought new shareholders and much needed liquidity, saving it from collapse and giving it a second chance. Monarch's progress in 1H2015 shows that it intends to take it.
In Mar-2015 CAPA published a report highlighting how Belgrade Airport, in tandem with Air Serbia, was working towards a re-balancing of power in central and eastern Europe, away from the traditional hubs of Vienna, Budapest and Prague, although it had a long way to go to achieve such an ambitious aim.
Belgrade Nikola Tesla Airport passenger numbers grew almost 32% in 2014 and Air Serbia underwent “one of the most amazing turnarounds in history,” as it joined the Etihad equity partnership. But not everyone is experiencing such blue skies.
This is an appropriate moment to review infrastructure investments and privatisation activities at airports throughout the entire region, where there are opportunities for investors through concessions, BOTs and IPOs. But as ever, caution is required.
On 26-Jun-2015, the US Congress went into a recess without having approved a renewal of the charter for the Export Import Bank of the United States (Ex-Im Bank), the country’s export credit agency. Congress doesn’t return to session until 08-Jul-2015, forcing a hiatus of at least a week on further Ex-Im Bank financing activities.
When the bank's Congressional funding authority expired on 30-Jun-2015, it became unable to undertake new transactions. Existing financing – some of it stretching out as far as 18 years – will continue unaffected, but new activity will effectively cease.
This is the first time in the bank’s 81-year history that it has been forced to suspend its lending activities, even on a temporary basis. Once a source of bipartisan unity, the Ex-Im Bank has fallen victim to Tea Party activism, ideology and the increasingly acrimonious nature of US politics. It is hard to see who wins from this silliness.
SAS narrowed its underlying loss in 2QFY2015, after stripping out the gain on the sale of two slot pairs at London Heathrow. The Scandinavian airline is enjoying a more benign capacity environment this year, particularly in short and medium-haul markets, and is cutting its own capacity. This allowed it to grow its unit revenue at a faster pace than its unit cost, prompting a modestly more positive outlook for FY2015.
Although SAS has invested in product improvements and is growing its revenues from members of its Eurobonus scheme, low cost competition in Europe is making short-haul markets increasingly price-based. FY2015's positive unit revenue conditions may not last, especially within Europe.
Looking into 2016, SAS is planning to return to capacity growth, through long-haul expansion. It is looking at adding further long-haul aircraft to its fleet, beyond the four A330s and eight A350s currently on order. However, competition on long-haul markets is also fierce.
Flybe reported a pre-tax result for FY2015 in line with expectations, confirming that its restructuring is starting to have a positive impact. Confusingly, the reported FY2015 result fell into loss after having recovered in FY2014, but this was blurred by a series of non-recurring/non-operating items. Flybe also reported what it calls an "illustrative" pre-tax result, by which measure its profit grew and this more closely reflects the progress made under CEO Saad Hammad.
Passenger unit revenue grew, driven by capacity cuts and sharp load factor gains, stimulated by falling yield. However, revenue from contract flying and charter operations fell and the increase in underlying profit owed much to unit cost reduction.
Flybe also signed a contract flying agreement for SAS and sold its stake in its Finnish joint venture. Moreover, it made progress with a number of other legacy issues, including exiting from its Embraer E175 order and securing additional used Bombardier Q400 aircraft. A key outstanding issue is finding a solution to its surplus E195 aircraft. In FY2016, it must aim for an improved result without having to rearrange the numbers.
Reporting its first financial results since its Feb-2015 IPO, Wizz Air announced that its underlying net profit jumped by two thirds in FY2015. In another year of double digit capacity and revenue growth, it managed to grow its unit revenue while simultaneously lowering its unit cost.
Ranked by operating profit margin for the 12M period to Mar-2015, Wizz Air is equal second with easyJet and behind only Ryanair in the list of Europe's most profitable airlines. The IPO has also left it with a robust balance sheet, a useful attribute in the volatile airline industry.
Wizz Air's guidance for FY2015 implies much slower profit growth of less than 20%. Lower fuel prices and a competitive market backdrop look likely to put unit revenue under pressure. Moreover, further unit cost reduction is harder when costs are already very low. Nevertheless, Wizz Air's low cost base and impressive ancillary revenue performance, together with strong market share in Central and Eastern Europe, position it to remain one of Europe's more successful airlines.
Ryanair's FY2015 net profit jumped 66%, a return to profit growth after a rare dip in FY2014. It was helped by lower fuel prices, but, unlike many other European airlines, Ryanair would still have reported improved FY and 4Q results with no change in its average fuel cost per seat versus last year.
Average fares barely changed (up 1%), but load factor jumped to 88%, from 83% in FY2014, driving up revenue per seat, even in Q4 when average fares fell sharply. Ryanair's new customer service initiatives and improved airport network may not yet be attracting consistently higher fares, but they are persuading more passengers onto its aircraft. What's more, revenue per seat growth outpaced the resultant increase in cost per seat.
Ryanair is being cautious about fares into FY2016, but still expects another 10% growth in profit. Moreover, the combination of product and service improvements and a wide discount to competitor fares should benefit pricing in the longer term, even as further load factor gains become less dramatic.
Both of Turkey's two largest airlines reported improved results and operating margins in 1Q2015 against the same period a year earlier. Both remained loss-making at the operating level in this seasonally weak quarter, although Turkish recorded a net profit as a result of foreign exchange gains on the revaluation of debt.
As is often the case, currency movements had a significant impact on the results of both airlines. For Pegasus, unit revenue reported in its functional currency, EUR, benefited from that currency's weakening against both TRY and USD.
For Turkish Airlines, unit revenue in its functional currency, USD, was adversely affected by the strengthening of that currency against EUR and TRY, which account for the majority of its revenue. Overall, both managed to increase their margins mainly as a result of lower fuel prices.
Airberlin narrowed its operating loss in 1Q2015 compared with 1Q2014, by growing unit revenue faster than unit cost, which was almost flat year on year. Unit revenue appears to be benefiting from network changes and a new revenue management system (and also from currency movements). However, the relatively contained unit cost performance owed much to lower fuel prices, without which the operating loss would have increased. Moreover, the airline said that seasonal effects such as Easter also had a positive impact on the result.
Airberlin still expects that yield improvement will lead to a "noticeable" improvement in earnings in 2015 after heavy losses in 2014. However, it says that "current foreseeable business development in 2Q has so far not fulfilled expectations". It continues to face significant challenges in its turnaround.