- CAPA Analysis
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Airberlin has made its first 2Q net profit since 2009, although its operating result was still negative and both its net and operating results were in loss for1H. It seems unlikely that 2014 will see a full year operating profit, but losses are at least becoming narrower. Airberlin is now seeing the benefits of its Turbine cost reduction programme and its sharper network focus.
In Apr-2014, recognising that Turbine was not enough to restore sustainable profitability, airberlin announced a more fundamental review of its business model.
This review will continue until the end of Sep-2014, but CEO Wolfgang Prock-Schauer has provided some insight into the early results of airberlin's new thinking.
Benefiting both from a large and growing home market and from its strategy to increase transfer traffic, Turkish Airlines (THY) continues to achieve double digit growth in traffic and revenues. Nevertheless, THY reported a year on year drop in its operating profit in 2Q2014 for the fourth successive quarter (although net profit increased due to non-operating items). It was also the fifth successive quarter to suffer a fall in unit revenue (RASK, expressed in USc).
Although it has an efficient cost structure by FSC standards, it has struggled in recent quarters to lower CASK enough to offset downward pressure on RASK. In this report, we put THY's recent quarterly results performance into a more strategic perspective by looking at its strengths, weaknesses, opportunities and threats.
Shortly before Virgin America reported one of its best financial performances in its history during 2Q2014 as profits trebled year-on-year to USD37 million, it announced an imminent IPO for 2014.
After a 1Q2014 loss of USD22 million Virgin America still managed a USD15 million profit during 1H2014.
This is the second part of a SWOT Analysis of Virgin America.
The first part was published on 18-Aug-2014.
Finnair improved its load factor in 2Q2014 after a dip in 1Q and made further progress with its cost reduction programme. It has reached agreement with many employee groups over further cost efficiencies, but did not reach full agreement with flight attendants. Management's consequent decision to begin implementing plans to outsource part of its cabin services activities displays a commendable resolve to achieve the necessary savings.
Nevertheless, in the words of CEO Pekka Vauramo, "the second quarter of 2014 was difficult".
Weak market conditions meant that unit revenue declined more rapidly than unit costs and the airline fell into loss in 2Q2014. It now expects a significant operational loss for FY2014, which would mean a second year of falling results.
Pegasus Airlines' fourth successive fall in underlying quarterly profit, but perhaps turned a corner
Although Turkish LCC Pegasus Airlines reported a year on year increase in 2Q net profit, the underlying operating result was less than the same period last year. This was the fourth successive quarter of year on year declines in the underlying operating result.
Reading Pegasus' results is complicated by foreign exchange movements, since the majority of its revenues and, particularly, its costs are denominated in hard currency (mainly EUR and USD). Expressed in EUR terms, rather than in Pegasus' reporting currency of TRY, Pegasus lowered its CASK (cost per available seat km) in 2Q, but enough to compensate for the drop in RASK (revenue per available seat km).
Nevertheless, Pegasus reiterated its FY2014 guidance amid some signs that it may have turned a corner and be ready to leave the path of deteriorating margins.
Virgin America recorded one of its best financial performances in its history during 2Q2014 as profits trebled year-on-year to USD37 million. After a 1Q2014 loss of USD22 million Virgin America still managed to eke out a USD15 million profit during 1H2014.
The airline has also officially submitted the necessary information to US regulators for an initial public offering, something Virgin America has frequently discussed during the past year. Its prospects of successfully executing an IPO remain challenging. Virgin America’s financial track record and, albeit improving, its balance sheet remains only limitedly attractive to potential new investors.
Despite progress in its financial performance, Virgin America’s challenges for now continue to outweigh its strengths, a scenario it needs to turn around for the long term. Its current investors may be pressing for an IPO, but accessing the public market does not guarantee long term staying power. In this Virgin may be helped by the current "restraint" of the newly consolidated majors, providing greater stability not only for themselves, but also for other quality incumbents.
US ultra low-cost airline Spirit Airlines has embarked on the first phases of adding sophistication to the revenue management of ancillary products. The foundation of its business model is based on maximising total revenue, which includes both revenues generated from fares and add-ons including carry-on and checked luggage and seat assignments.
Fort Lauderdale-based Spirit during 2Q2014 introduced some rudimentary dynamic pricing on bag charges during peak periods as it works to maximise its ancillary revenues. Spirit has previously stated that it could foresee non-ticket sales representing 50% of its revenues in the future; but concludes the growth will be more incremental compared with the rapid expansion of those sales during the past few years.
Spirit is gearing up for a high growth period as its capacity in CY2015 is growing roughly 30%. The increase may seem hefty for the mature US market place, but Spirit is repeatedly assuring there is enough stimulative demand to support its ambitious growth targets.
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.
Air Europa's seat capacity will be 13% higher in 2014 than in 2013, according to OAG data. In spite of strong recent growth, however, it is still only the sixth biggest airline in Spain by seat numbers, with a share of just over 5%. Its strongest network region is Latin America, where its 23% share puts it second only to Iberia and where it is growing most rapidly.
As we highlighted in our 5-Aug-2014 analysis of Air Europa, a number of key financial indicators improved in 2013. Although its profit recovery may be a little ahead of that of its rival Iberia, the latter is also moving into a more confident phase after years of losses and restructuring.
With competition between Air Europa and Iberia intensifying on long-haul and LCCs continuing to increase their share of the Spanish market on short-haul, we take an analytical look at Air Europa's network and strategic positioning.
IAG's recent announcement that Iberia is to receive 16 new widebodies marks a shift of emphasis for Iberia from internal restructuring towards a new competitive growth phase. Rival Air Europa has taken advantage of Iberia's capacity cuts in recent years to pursue international growth, particularly to Latin America. Parent company Globalia does not report profits for Air Europa, but the group's annual report shows 2013 was very successful for increased revenues, load factor and RASK. It also saw Globalia's return to profit, while Iberia was still posting losses in 2013. Moreover, Air Europa already has its own widebody order (eight Boeing 787-8s and options for eight more).
However, Iberia returned to profit in 1H2014 and its CEO Luis Gallego is relaxed about competing with Air Europa, saying Iberia is "three times [its] size at [Madrid Airport] and twice its size in Spain" and can now "compete with anyone" thanks to its new cost structure (Europa Press/Preferente, 22-Jun-2014).
This analysis of the available data on Air Europa's traffic and financial performance will be followed by our updated analysis of its strategic positioning.
Robust demand is driving Canada’s WestJet to revise its CY2014 capacity upwards, largely through higher aircraft utilisation. The airline is opting to increase its supply as it recorded strong 2Q2014 results that included solid growth in profitability and better than expected unit cost performance.
WestJet also saw a rebound in unit revenues and yields during 2Q2014 after encountering pressure in those metrics during the past year - mostly driven by its own capacity growth from the debut of its regional subsidiary Encore and pricing pressure in some of its markets.
The airline believes that many initiatives it has undertaken during the past few years – fare bundles, the creation of Encore, and other product improvements – are beginning to bear fruit, which is driving an overall bullish outlook for WestJet as it embarks on the operation of widebody jets in late 2015.
International Airlines Group (IAG)'s 2Q2014 results revealed another strong improvement and 1H2014 recorded the first positive operating result for IAG since 2011. Unit revenues were under pressure and so the profit improvement was achieved by unit cost reductions.
All three of IAG's operating airlines - British Airways, Iberia and Vueling - improved their 2Q operating profit year on year, with BA and Iberia also recording higher margins.
Recognising the progress made by Iberia, which returned to operating profit in 2Q and 1H, IAG has announced that the Spanish airline will see 16 new wide bodies enter its fleet from 2015 to 2020 to replace A340 aircraft. A year ago, CAPA suggested that IAG might have reached a turning point. Its results since then, and its reiteration of its profit targets, appear to confirm that this was the case as it has outperformed its major European rivals Lufthansa and Air France-KLM.