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Etihad's first joint financing with equity partners further tests archaic airline ownership rules

1-Oct-2015 3:39 PM

Etihad continues to implement new forms of cooperation with its equity partner airlines, pushing beyond the limits of other partnerships not involving a controlling stake. The Etihad equity alliance goes beyond codesharing and revenue-generating activities to also seek cost synergies, which partnerships and alliances have seldom managed to achieve.

Etihad is now moving from specific operational synergies (crew resources, aircraft) to macro financing across the group via a USD700 million joint bond financing transaction in the capital market. The allocation of the funds is nearly 20% each to Etihad, Etihad Airport Services, airberlin and Alitalia; 16% to Jet Airways; and the remainder to Air Serbia and Air Seychelles. This is the first time that Etihad and its equity partners have raised funds together and may be the first such joint financing anywhere in the airline industry.

Etihad's equity alliance consists of non-controlling stakes. Nevertheless, as the airline itself said in a release on 21-Sep-2015, the partners collaborate "through measures which otherwise would only be available through mergers or takeovers". Etihad Airways Partners is looking and feeling more and more like a consolidated group of companies under common ownership and control.

Iberia: the Futuro looks bright for IAG's star pupil as its confidence and growth are transformed

30-Sep-2015 4:36 PM

Iberia is emerging as the star pupil in the IAG airline academy, studiously following its 'Plan de Futuro' restructuring programme. It has learnt how to achieve labour productivity improvements and unit cost reductions. With Iberia Express, it has demonstrated it is possible for legacy airlines to launch subsidiaries that combine an LCC cost base with a full service brand.

After receiving punitive beatings in the form of capacity reductions, its diligence is now being rewarded with new aircraft orders and double digit ASK growth in 2015, thanks largely to Latin American expansion (and returning to routes suspended during its restructuring). Brimming with new-found confidence, Iberia is IAG's biggest contributor to ASK growth in 2015.

Iberia is not yet qualified to graduate by recovering its cost of capital, but is on track to achieve this, in accordance with IAG's target, by 2017. As with all airlines, sustainable profitability may require some benevolence from the macro environment, which can deliver harsh movements in unit revenue and in fuel prices. However, Iberia's sharp focus on labour CASK, fuel efficiency and non-fuel overheads should soften the impact of any deterioration in external conditions.

CAPA's new CASK database allows global airline unit cost benchmarking and strategic mapping

18-Sep-2015 11:31 AM

One of the key competitive dynamics in the aviation industry is the relative cost efficiency of different airlines, as measured by cost per available seat kilometre (CASK). CAPA's new CASK Database plots CASK against average trip length, giving its members an important graphical tool for comparing competing airlines and highlighting broad differences between them.

A direct comparison of CASK, or unit cost, for different airlines is not straightforward as it varies with the average distance flown. In general, the cost of producing a seat kilometre falls as average trip length increases since fixed costs are amortised over more seat kilometres and variable costs, such as fuel, are more efficiently consumed in longer flights. Plotting CASK versus average trip length allows the relative cost efficiency of different airlines to be compared visually.

SAS capacity cuts help return to 9M operating profit as Hong Kong launch signals expansion for 2016

11-Sep-2015 6:54 PM

Scandinavian airline flag SAS followed up on its reduced operating loss in 1H2015 with a healthy increase in profit in 3Q2015. This was sufficient to take its 9M2015 operating result back into profit after making a loss a year earlier. As in 1H2015, SAS' yield benefited from a better balance of supply and demand compared with last year. This helped unit revenue to grow faster than unit cost, in spite of a significant currency headwind on costs.

SAS' capacity cuts this year, led by charter operations and the long haul network, seem to have had a beneficial effect on unit revenue in spite of falling load factor. Long haul expansion, starting this autumn with a new Stockholm-Hong Kong route and continuing in 2016 with three new US routes, will lead to ASK growth next year and this may put some downward pressure on unit revenue.

Airport financial results 1H2015 – primary airports, hubs, alliances, retail, sustain profitability

8-Sep-2015 11:00 PM

Recently, Airports Council International (ACI), the airports global trade representative, observed that, “in many instances, airlines are not paying the cost of the airport infrastructure they use.

"In fact, some airlines are now pushing for even lower airport charges, arguing that such cuts would save passengers money and thereby boost employment opportunities.

"We believe such arguments are flawed and make overly optimistic assumptions of how directly passengers would benefit from such cost reductions.”

Airports are now deriving on average 62% of revenues from passengers, through retailing and other activities, and only 38% from the airlines they serve.

Aegean Airlines Group: competitive pressures and Greek macro uncertainties weigh on 1H profit

7-Sep-2015 5:11 PM

The Aegean Airlines Group's 1H2015 operating result deteriorated against the same period last year, although the decline was not as severe in 2Q as it had been in 1Q. Although Aegean managed once again to cut unit costs, it suffered from an even greater drop in unit revenue.

Faced with strong competitive expansion (led by Ryanair) and a challenging economic backdrop, Greece's largest airline group continues to go on the offensive by growing capacity at double digit rates. These factors have locked it into a downward path of yield and unit revenue.

Even the relief of lower fuel prices has not allowed Aegean to cut unit costs fast enough to ensure operating profit growth. Europe's most profitable FSC airline of 2014 is finding that 2015 is a totally different year.

Aeroflot back in operating profit in 1H. Transaero acquisition to take its market share close to 50%

4-Sep-2015 4:00 PM

The Aeroflot Group turned around an operating loss in 1H2014 into a profit in 1H2015. The depreciation of the RUB served to boost both revenue and operating costs, with a net negative impact, but Aeroflot managed to grow its RASK more rapidly than its CASK.

The Ukraine crisis and tense international relations continue to weigh on demand for travel to/from Russia. But demand for domestic flights is growing strongly.

Moreover, Aeroflot is taking advantage of capacity reductions by cautious international rivals and struggling domestic competitors to increase its leading share of the Russian air transport market. The group's market share now looks set to jump to embrace almost a half of all passengers to/from/within Russia once it completes the acquisition of second ranked Transaero.

US airline fleet strategy and finance Part 1: The Big 3 take differing approaches to fleet revamps

3-Sep-2015 12:50 AM

The three large US global network airlines are busy undertaking re-fleeting projects, taking advantage of favourable interest rates as they replace ageing aircraft in their mainline fleets. American and United in particular have touted favourable rates they have garnered in 2015 to fund a portion of their aircraft deliveries.

But each airline is taking a slightly different approach to mainline re-fleeting. American is focussed on adding new build aircraft to replace ageing MD-80s while United has tapped the used narrowbody market during 2015. The attractiveness of used aircraft obviously increases in a low fuel-cost environment, but those jets also become more attractive as deliveries of next generation narrowbodies drive down values of existing models.

Delta Air Lines has long adopted a philosophy of sourcing used narrowbodies, concluding that the lower ownership costs of those aircraft provide overall financial benefits. The airline is also taking delivery of new narrowbodies, but is opting to stick to current generation models, reflecting a conservative approach to hastily adopting new aircraft technologies.

British Airways: IAG's favourite child should follow reformed sister Iberia's unit cost example

27-Aug-2015 6:00 PM

In a May-2013 report on British Airways, we called it the favourite child of parent IAG. Its good behaviour was being rewarded with new fleet toys, while sister Iberia was scolded to mend its ways.

BA should match its best ever operating margin in 2015 and better it in 2016, even covering its cost of capital - a salutary model for its European counterparts. After the global financial crisis, margin recovery was mainly due to unit revenue growth. A RASK downturn in 2014 and 1H2015 has seen margins improve through lower unit cost, but these were largely thanks to lower fuel prices. Even a premium brand cannot always rely on unit revenue growth and BA still needs to cut CASK, with a focus on labour. It remains one of Europe's higher unit cost airlines and Iberia has cut CASK more successfully.

Iberia's reformed ways have been feted like the return of the prodigal and now BA has two more siblings. Up and coming teenager Vueling has been given significant trust and responsibility for one so young, while new arrival Aer Lingus will demand much parental attention. BA will need the maturity and determination of the eldest child to graduate to full value-creating adulthood.

Finnair narrows 2Q loss, looks to recent restructuring and imminent A350 delivery for profit boost

21-Aug-2015 10:04 PM

Finnair narrowed its operational loss for 2Q2015 and for 1H2015. In spite of broadly flat capacity (ASK growth of just 0.4%), passenger revenue increased by more than 4%, helped to some extent by currency movements. However, total revenue fell slightly and the improved operational result was achieved through a bigger reduction in costs, thanks to lower fuel prices.

Finnair noted that there were signs of recovery in the demand for consumer and business travel in all traffic areas. Its 1H2015 report shows that it has started to improve its results and it now targets a break even or slightly positive operational result for FY2015 after a EUR37 million loss last year.

Moreover, with average 2Q2015 headcount down by more than 500 (10%) year on year, Finnair's restructuring of recent times paves the way for productivity gains. Its profitability should also benefit from the introduction this autumn into its long-haul fleet of Airbus A350-900 aircraft to replace ageing A340 equipment (which currently have an average age of 12.7 years according to the CAPA Fleet Database).

Turkish Airlines: the positives of global super-hubbing can turn awry as 2Q unit revenue falls

21-Aug-2015 7:40 PM

Turkish Airlines' operating profit fell in 2Q2015 compared with the same period a year earlier, after three successive quarters of improving results. It suffered a very heavy fall in unit revenue, mainly due to weak yield, but also the result of a dip in load factor. Pricing softness owed much to foreign exchange movements, but also highlighted a weaker balance of demand versus supply in a number of THY's many markets.

Turkish Airlines' strategy of connecting global traffic flows through its Istanbul hub has driven sustained growth over a number of years. However, this can also leave it exposed to a wide range of external demand risks around the globe and this is undoubtedly weighing on unit revenue and profits at the moment. It is also in the middle of a period of fierce competition with LCC Pegasus Airlines at Istanbul's second airport Sabiha Gokcen, the result of capacity constraints at Ataturk before the building of a new airport by the end of the decade.

Pegasus Airlines: weak unit revenue drags 2Q into operating loss. Sabiha Gokcen remains competitive

18-Aug-2015 3:44 PM

In 2Q2015, Pegasus Airlines' operating result fell into loss in what is usually a profitable quarter for the Turkish LCC. Foreign currency movements served to inflate both revenue and costs, with a net negative impact on profitability.

However, the negative result was largely driven by the weakness of unit revenue (RASK), which was dragged down both by poor yields and falling load factors. It seems that the competitive landscape at Sabiha Gokcen, Pegasus' main base, remains highly competitive thanks to Turkish Airlines' expansion and the LCCs own strong capacity growth.

If it is to meet its FY2015 profitability target, Pegasus will have to perform more strongly in 2H2015, in particular in 3Q (which typically accounts for the vast bulk of annual profit).

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Financial Results

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.

This content is exclusively for CAPA Membership Subscribers

CAPA Membership gives you the latest aviation news and alerts, access to CAPA articles, reports, and our leading aviation data with optional premium add-ons.