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Aer Lingus grows FY operating profit, but needs further cost cuts. Meanwhile, IAG bid inches forward
Aer Lingus grew its operating profit in 2014, although the net result fell into loss due to a one-off pension scheme payment. Unit revenues increased across the network, helped on European routes by modest capacity reduction, but also achieved on the North Atlantic in spite of double digit growth.
However, unit costs increased too, albeit a little more slowly than unit revenues, and have been rising for five years. In 2014, this was partly explained by costs of further long haul growth before assets are fully utilised. Nevertheless, Aer Lingus has rightly identified unit cost reduction as a priority to drive margin expansion.
This will be vital, regardless of the outcome of IAG's bid for Aer Lingus at EUR2.55 per share (EUR2.50 in cash and EUR0.05 in dividends). The Irish government, holder of 25% of the company, now seems to be inching towards the IAG deal. However, there could be a sticking point in its recent request that IAG extend beyond five years the commitments it has offered over the continued use of Aer Lingus' Heathrow slots on Irish routes.
Air France-KLM back to operating loss; warns lower fuel may be offset by low unit revenue & currency
Air France-KLM marked its first decade with a return to loss at the operating level in 2014. A pilot strike over the development of LCC Transavia took EUR425 million off the operating result, which would otherwise have been positive and higher than in 2013. The dispute was settled and Air France-KLM's generally good history of labour relations suggests that it is unlikely to be repeated in 2015.
Nevertheless, the settlement required management to compromise its plans for Transavia and this may make it harder to push through further important restructuring across the group. Moreover, even without the impact of the strike, the year was characterised by ongoing unit revenue weakness, particularly in long-haul markets such as Latin America.
Air France-KLM does not see this market environment improving. Indeed, it has suggested that the benefits of lower fuel prices in 2015 may all be eaten up by falling unit revenue and currency movements. The group has abandoned its previous EBITDAR growth targets, but is cutting its investment plans and is accelerating its unit cost reduction. There is more turbulence ahead.
Norwegian's 2014 losses marked a dramatic slump after seven years of net profits (five years of operating profit). There had been some warning signals in 2013, when Norwegian's profits declined versus 2012, due to rapid capacity expansion, the launch of its first long-haul routes, delays to Boeing 787 deliveries and a very price competitive market place.
In 2014, most of these factors continued to weigh on Norwegian, for whom the weakening of the NOK was an additional challenge. A difficult year always seemed likely. Nevertheless, the size of its loss was worse than expected. Unit cost reduction failed to keep pace with the drop in unit revenues.
After another year of debt-fuelled fast capacity growth in 2014, Norwegian will take something of a breather in 2015, when its growth will be much more cautious. This should help unit revenues, but its 2015 CASK target suggests that it does not expect significant cost efficiency improvements other than from lower fuel prices.
Finnair's net loss for 2014 was its first since 2011, but its fifth in the seven years since 2008. Over the past decade or so, losses have been more common than profits. Its niche in connecting Europe with Asia via Helsinki has placed Finnair among Europe's top twenty airline groups, although Finland ranks outside the top twenty countries by population.
But converting this niche into sustainable profitability is proving a major challenge. Whenever Finnair makes progress with cost reduction (and it has made major strides with labour productivity), it seems that revenue pressures wipe out those benefits. In 2015, Finnair anticipates a further drop in unit revenue, reflecting the highly competitive nature of its markets.
This year will also present opportunities for Finnair to build a more solid base. It will be the first full year under new labour agreements and with a number of product improvements in place. It will also see its first A350 delivery. Lower fuel prices are a stroke of luck, but Finnair needs to ensure it can be profitable without relying on this good fortune.
Icelandair: Atlantic niche drives strong growth in 2014, but 2015 profit growth relies on lower fuel
Icelandair Group grew rapidly again in 2014. International passenger numbers were up 15%, hotel bookings were up 8%, revenue grew by 9% and net profit grew by 18%. Traffic growth was driven by a disproportionate increase in connecting passengers travelling between Europe and North America via its Reykjavik hub.
Icelandair's success in this niche has lifted the number of trans-Atlantic transfer passengers it carries from 1.4% of total AEA North Atlantic traffic in 2009 to 4.2% in 2014. With two new destinations (Birmingham and Portland) and 14% international capacity growth planned for 2015, the airline is sticking to this strategic course. Moreover, it anticipates further profit growth this year.
However, the main reason for higher expected profits in 2015 is lower fuel prices. This is fortunate, given higher wages and the costs of additional capacity. Transfer traffic is typically attracted by discount pricing and growing LCC competition on routes to Iceland, particularly from Europe, will increase downward yield pressure. Icelandair will be hoping that fuel prices do not jump upwards once more.
The late Jan-2015 profit warning from Flybe, the UK's largest regional airline, is a reminder that no restructuring programme ever follows a smooth path. Over the past couple of years, the airline has made good progress with cost reduction, repaired its balance sheet with fresh equity and a Gatwick slot sale, trimmed its network, exited a loss-making Finnish joint venture and rebalanced its fleet plan towards turboprops. In spite of its focus on the UK regions, it has also entered London City, London Southend and London Stansted.
However, the competitive response to its London City entry has been stronger than it anticipated and, although most of its network faces no airline competition, LCCs are its main competitors on routes where there are other airlines. This puts pressure on yields (although the impact on revenues is partially offset by Flybe's raised load factor). In addition, leasing costs associated with Embraer 195 jets that Flybe no longer wants are weighing on its results.
In this report, we consider these issues in the context of a review of Flybe's strengths, weaknesses, opportunities and threats.
Both Ryanair and easyJet recently reported strong progress during the quarter ended Dec-2014. Both demonstrated that losses in the traditionally weak winter period are narrowing. Ryanair even looks set to report a profit for its winter half year and raised its guidance for FY2015 (March year end).
Ryanair cautioned that high levels of fuel hedging would limit profit growth in FY2016, especially as it expects lower fuel costs to add to downward pressure on fares. easyJet too has fairly high levels of fuel hedging. Nevertheless, both look well positioned to take further market share from higher priced legacy carriers, building on initiatives around product and service quality and targeting business travellers (although they are at different stages in these areas).
Where there is a marked contrast between Ryanair and easyJet is in average revenue per passenger. Ryanair's lower costs allow it to sustain lower fares profitably. For many years, the two have mainly attacked different markets, but head to head competition between them is on the increase. In this report, we analyse the extent of their overlap.
Alitalia has announced a new strategy to accompany its newest incarnation, following Etihad Airways' acquisition of a 49% stake in the Italian airline from 1-Jan-2015. The strategy includes the aim to return the company to profit in 2017, after a long period of losses. The five main elements of Alitalia's strategy focus on the network, cooperation with partner airlines, the fleet, "guest services" and the brand.
Alitalia's statement does not contain much of consequence that has not previously been flagged. Rather, it reiterates adjustments to its network designed to complement that of Etihad.
There will be less direct flying to Africa, a little more to Asia and a lot more to the Middle East to feed Etihad's hub. Alitalia will also increase its operations in the Americas and in Europe, where Etihad's own presence is smaller.
The crucial question that the statement does not address is how Alitalia will go about changing the mindset, developed over many years, that regards perpetual losses as the norm. Even if the necessary cuts can be achieved, such an entrenched culture is not easily redirected. Yet, for Alitalia, this is surely the last throw of the dice.
CAPA's Airline Fleet and Finance Summit, 2/3 March 2015:
As LCCs across the intensely competitive short-haul Asian market rethink their business models in light of the Ultra-LCC model success in Europe and North America, questions are being asked as to how they can successfully differentiate their offerings to improve profitability. Unbundling the product offering is one strategy, while pursuit of a greater share of the corporate market or tapping regional markets are other responses. Meanwhile the low cost-long haul model will continue to evolve in 2015 and more connections within the region and particularly to the Middle East Europe are likely.
The common factor however is the large number of aircraft deliveries needing to be financed by these airlines, as well as traditional airlines in the region. But financiers are concerned about backing the airlines that will be the winners in an evolving marketplace.
CAPA'S Airport Finance and Privatisation 2013 report referred to a reduction in airport M&A transactions and particularly those involving secondary and tertiary level airports.
That trend has broadly continued into 2014. But this past year was also notable for the arrival or approach of a number of significant deals on the world stage involving mainly primary airports. In a handful of cases large tranches of regional airports.
The financing of airports is increasingly dominated by huge international funds. There is still great diversity amongst investors and operators but there is a constant shift towards funds – infrastructure; pension; sovereign wealth; and hedge funds and private equity, globally. Also there is an increasing propensity for strategic investors increasingly to invest in infrastructure assets in emerging markets where growth forecasts are significantly above the mature markets in Western Europe and North America.
This summary report outlines the main developments by region and by country.
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.