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SAS fell back into net loss in FY2014 and its operating profit margin was only 1.0%. It is achieving its cost reduction targets and moving towards a more effcient operation. Moreover, product and network initiatives have helped to stimulate load factor improvements and growth in the number of frequent flyer members using the airline.
However, in a highly competitive market-place characterised by capacity growth and downward price pressure, unit cost did not fall enough to offset the drop in unit revenue. SAS has now announced further cost savings plans and is reorganising its regional flying activities.
SAS has achieved much over the past two years, streamlining the group and cutting costs. It has lowered its CASK by 10% since 2012, bringing it more in line with other European FSCs. The problem is that the main competitive threat comes from the LCCs and SAS' cost base is still much higher than theirs. It seems it must always work harder just to tread water.
Ryanair lags easyJet on business traveller & customer service initiatives; both have great potential
Ryanair recently raised net profit FY2015 guidance (year to March) for the second time. It now expects EUR810 million to EUR830 million, up from its previous range of EUR750 million to EUR770 million. This was thanks to faster passenger growth, stimulated by lower fares, but also reflecting improved customer service and new routes.
The largest carrier of passengers within Europe, Ryanair has rebounded very strongly from last year's profit warnings. Almost at the flip of a switch, it has raised its load factor and profit margins. It is opening new routes from more primary airports and with greater frequencies, increasing its appeal to business passengers.
Ryanair lags easyJet in its initiatives towards business travellers and regarding wider customer service improvements. Moreover, revenue per passenger is set to dip in 2HFY2015 as it absorbs strong capacity growth. Nevertheless, Ryanair has a significant opportunity to grow revenue per passenger as it follows easyJet up the yield curve. In this report, we compare the two on frequencies, presence in major airports and unit revenues. There is still room for both.
KLM: a decade after Air France merger, the smaller, but more profitable partner also needs cost cuts
KLM, the world's oldest airline still operating, turned 95 in Oct-2014, after passing the 10th anniversary of its merger with Air France earlier this year. A pioneer of the international hub and spoke model, KLM's continued operational effectiveness is illustrated by its industry leading load factor. Although, before the merger, it often struggled for profitability, it has consistently achieved higher operating margins than its sister airline Air France since their 2004 union.
In spite of these marks of success, KLM CEO Pieter Elbers, promoted to replace Camiel Eurlings in Oct-2014, is asking employees to suggest ways of making cost savings of EUR700 million over five years. This is to fund widebody upgrades and service enhancements, including new seats for 15 Boeing 777 aircraft and business lounge expansion. KLM is also placing a freeze on new cabin crew hires and giving consideration to job reductions.
Much of the commentary on Air France-KLM Group's new Perform 2020 programme has focused on Air France, loss-making since FY2009. In this report, we look at KLM's post merger track record at a time when its margin is under pressure.
At its Capital Markets Day in late Nov-2014, Flybe asserted that it "does not compete with low cost carriers, flag carriers or mid-haul leisure airlines". Moreover, our analysis shows that it rarely competes with other regional airlines. In fact, Flybe faces no competition of any kind on 78% of its city pair routes in its Dec-2014 schedule. Moreover, it is Europe's largest independent regional airline and Europe is the world's largest regional market.
In spite of these advantages and what looks to be a relatively efficient cost base by comparison with other European regional airlines (according to our analysis), Flybe has yet to re-establish sustainable levels of profitability. Much has been achieved since the change of senior management in 2013, but the regional airline's fundamental CASK disadvantage will remain a challenge even as it increases its focus on turboprops rather than regional jets.
The Aeroflot Group suffered a 31% drop in its operating profit and reported a net loss in 3Q2014, the seasonally strongest quarter. Although the net result was weighed down by foreign exchange movements and non-recurring items, the underlying profitability of the Group suffered due to RASK falling while CASK increased.
Demand on international routes has suffered as a result of the geopolitical backdrop, forcing Aeroflot to focus its growth in the domestic market.
Geopolitical events also led to the cessation of Aeroflot's fledgling LCC subsidiary Dobrolet in Aug-2014. However, the Group has acted rapidly in launching a new low cost venture, Pobeda, which started operating between Moscow Vnukovo and Volgograd this week.
The Aegean Airlines Group's string of good financial results continued with 3Q2014 operating profit increasing by more than a quarter compared with the same period a year earlier (based on proforma figures with Olympic in the comparable). Aegean is growing its capacity at a double digit rate, with particularly strong growth in the domestic market and on international routes from Athens, just as Ryanair is expanding rapidly in Greece. This has led to downward pressure on yields and RASK, but Aegean has successfully cut CASK even more quickly to drive up its margins.
Competition between Aegean and Ryanair looks set to intensify in 2015, when the battle may extend to Cyprus, regardless of whether or not one of them is successful in biding for Cyprus Airways.
As Aer Lingus will testify, having Ryanair as your nearest and biggest competitor focuses the mind. Aegean will need to prove that its recent good run can be extended.
A new government in New Delhi since May-2014 has brought heightened expectations of faster GDP growth, industry reforms and enhanced transparency. But with an entirely new team leading the Ministry and most of the government agencies involved in aviation, there is a lack of experience at the top. It will therefore take some time for the key decision-makers to grasp the complexity of the situation.
A clear roadmap is yet to emerge on the Indian government’s proposed institutional framework, a strategy for Air India and the Airports Authority of India, and the intended policy settings on critical issues such as bilaterals, economic regulation and route dispersal guidelines. However, indications are that the government will push ahead and abolish the five year/20 aircraft threshold for international operations, airport privatisation, construction of low-cost airports and corporatisation of air navigation services.
The Aviation Minister has also been encouraging state governments to reduce the onerous sales tax on aviation turbine fuel which currently averages 24%. This would be the single greatest benefit that the government could deliver to the industry.
easyJet's most recent annual results, for the financial year ended Sep-2014, confirmed its position as one of Europe's most profitable airlines. Its pre-tax profit of GBP581 million was 22% higher than last year and its operating margin of 12.8% was up 1.1 ppts from last year. Among European airlines, easyJet ranks second only to Ryanair's 16.5% margin for the same 12 month period. According to its own measure of return on capital employed, it ranks first among leading European airlines and in the first quartile of companies from all sector's in the UK's benchmark FTSE 100 stock market index.
Significantly, these results seem to have silenced easyJet's founder and largest shareholder Sir Stelios Haji-Ioannou, who has also been its greatest critic in recent years since resigning from the Board in 2010. The proposed annual dividend will be 36% higher than last year and Sir Stelios' family stands to receive GBP63 million. One of the rare successes in the airline sector, CAPA analyses easyJet's strengths, weaknesses, opportunities and threats in this report.
Long considered, perhaps unfairly, to be the ‘bottom feeder’ of the air transport business, the global airport ground handling business is now estimated to be worth over USD80 billion per annum according to its trade association, ASA - while some say USD100 billion.
By comparison the airline industry turned over around USD700 billion in 2013.
Ground handling’s status may be growing but this particular business segment has unique issues that frequently dominate its agenda.
Part 1 of this report deals with the impact of liberalisation, the counter-intuitive inefficiency of multiple ground handlers and the recent UK Supreme Court's potentially disruptive decision on claims for delayed flights. Part 2 will review the consolidation of the ground handling industry and emerging alliances.
France's traditionally conservative aviation policy has meant that air services have focussed around Paris. The result is that there are few large airports outside the capital.
Moreover, the privatisation of France’s airports has been a long drawn out, stop-start process, which involved Aeroports de Paris at one end of the scale and a number of secondary level airports serving small cities at the other.
Sat patiently in the middle have been the primary level airports (only one of which handles more than 10 million ppa despite that designation).
But with the forthcoming privatisation of Toulouse Blagnac airport their time may have come at last.
After narrowing its operating loss in 1H2014, airberlin's 3Q result was in profit, but at a lower level than last year in what is the seasonally strongest quarter. Unit revenues continued to fall and the airline was unable to reduce unit costs sufficiently to compensate for this (even after allowing for restructuring costs). Another heavy loss is on the way for FY2014.
Airberlin has also given a further update on its new restructuring programme. In spite of indications earlier this year that the new programme might lead to fundamental strategic change, there is also little, if anything, that appears radical in the plan. Airberlin will remain in the same business segments, but redouble its efforts to do the same things more efficiently. Moreover, it has not really addressed one of the key themes we have identified in our analysis of the airline for some time, namely establishing its core purpose.
After four successive quarters of year on year declines in its underlying operating result, Pegasus Airlines reported an increase in 3Q2014. Its operating margin was at the same level as 3Q2013, after falling in 1H, and second in Europe only to Ryanair (of those to report thus far).
As always, Pegasus' results are complicated by foreign exchange, especially as Turkey's currency has weakened against EUR and USD. Expressed in its functional currency of EUR, rather than its reporting currency of TRY, Pegasus' CASK (cost per available seat km) edged up slightly in 3Q, reversing the decline of 1H. Fortunately, RASK (revenue per available seat km) also increased at a similar rate, ending a four quarter falling trend. This was helped by a relative slowing of its capacity growth in addition to less aggressive pricing by Turkish Airlines at Sabiha Gökçen.
Pegasus has reiterated its FY2014 guidance, although there now seems to be scope for it to do better. Our suggestion after 2Q results, that Pegasus may have turned a corner and be ready to leave the path of deteriorating margins, seems to be gaining credibility.