The year 2013 will go down in Aegean’s history as a year to remember. The Athens-based carrier has already packed a lot into its short life since it commenced operating scheduled passenger services in 1999. In that time, it has transformed its fleet; moved its head office; experienced growth, decline and a return to growth; seen a significant increase in LCC competition; become a regional partner to Lufthansa; joined the Star alliance; listed its shares on the Athens Stock Exchange; and undergone more than one merger.
2013 will go down as the year in which it acquired Greece’s former national flag carrier, Olympic Air, and in which it reversed a three year period of losses to record an annual profit once more. In the first nine months of 2013, it was back in the black, turning a EUR9 million loss into a EUR59 million profit. Although revenue per passenger growth slowed in 3Q, it stayed ahead of growth in cost per passenger. Nevertheless, with unit costs (CASK) higher than those of LCC competitors, it must now use the Olympic acquisition to drive cost synergies as far as possible.
Jet2.com’s parent, Dart Group PLC, enjoyed a strong increase in revenues and profit in the first half of the year to Mar-2014. Leisure-focused LCC Jet2.com is the group’s principal business, although it also includes a tour operator and a distribution business. The airline saw very healthy growth in traffic and revenues, improved yields and a positive trend in ancillary revenues.
Nevertheless, the outlook for the second half, which covers the winter season, is for increased losses. Moreover, profit growth for the full year, while still likely, is not guaranteed. The seasonality in the group’s business is growing, largely reflecting the wide gap in passenger demand for Jet2.com's leisure network between the summer and the winter.
Counter-seasonal business lines such as charter and cargo operations help to contain this. Nevertheless, comparison with its nearest peers, such as Monarch Airlines and Transavia, suggests that more could be done to narrow the seasonal gap. Any increase in the number of year-round destinations would probably also bring the challenge of increased competition with more cost-efficient LCCs
In CAPA’s report on Turkish Airlines’ 3Q2013 results, we highlighted that RASK growth failed to beat CASK growth for the first time this year and suggested management would want to demonstrate this was not the start of a new trend. The airline has now provided some reassurance on this.
Beyond this issue, CEO Temel Kotil used the recent Turkish Airlines’ investor day to reiterate his strategy of using the carrier’s Istanbul hub to attract global connecting traffic flows, leading to growth ahead of the market, albeit with an increased focus on frequencies rather than new destinations in future. This strategy has similarities with those of the Gulf carriers, but is also underpinned by the significant Turkish home market.
The Turkish market includes strong competition in the shape of LCC Pegasus, but the return to profitability of SunExpress, jointly owned by Turkish Airlines (THY) and Lufthansa, provides THY with another option for facing this competitive threat.
easyJet's FY2014 pre-tax profit increased by more than 50% to its highest ever level and its operating margin returned to double digits after more than a decade at less than 10%. Its pursuit of a more passenger-focused and business-serving LCC model has driven it to improve and innovate in terms of product, with features such as allocated seating and a user-friendly website now being copied by the likes of Ryanair.
This customer focus, together with what the company has called “a benign capacity environment”, as competitors were forced to reduce seat numbers, has led to impressive unit revenue growth, while management has not lost sight of cost control. Its confidence in the future was signalled by a dividend totalling GBP308 million.
Looking into FY2014, however, the outlook for unit revenues is less certain as capacity growth steps up a little, and profits are unlikely to grow as rapidly as they did in FY2013. Nevertheless, easyJet's business model remains robust and should deliver sustained healthy returns.
International Airlines Group: 2015 target raised thanks to BA & Vueling; Iberia still has work to do
As CAPA predicted, IAG increased its operating profit target for 2015 at its recent capital markets day. This reflects better progress than previously expected at British Airways, the integration of Vueling into the group and additional growth at both BA and Vueling.
The group’s target has been raised from EUR1.6 billion to EUR1.8 billion. British Airways’ own 2015 operating profit target has been raised from GBP1.1 billion to GBP1.3 billion. This would bring BA to an operating margin in the region of its best-ever level of 10%.
The increase in the BA target, translated into EUR, is more than the increase in the group target. The implicit reduction in the Iberia target increases the pressure on its restructuring programme to create a competitive cost base. Nevertheless, the group as a whole now faces the real prospect of generating a return on capital ahead of its cost of capital.
Airberlin delivered a 14% year-on-year increase in EBIT in 3Q2013, recording a positive quarter for the first time this year. The quarter also saw airberlin’s first reduction in unit costs (CASK) this year, reflecting good progress in the cost-cutting aspects of its Turbine restructuring programme.
However, the quarter also saw airberlin’s weakest RASK performance of 2013 and profits were not sufficient to restore a positive equity position to its fragile balance sheet. As a result mainly of a weak pricing environment, it has abandoned its previous FY2013 target for a breakeven EBIT result and set a softer target for year-end net debt reduction.
Airberlin CEO Wolfgang Prock-Schauer told analysts on the 3Q conference call that the relationship with Etihad was for the long term and that it “gives us time really to restructure the company properly”. This commitment looks likely to be tested again soon.
Turkish Airlines’ 3Q2013 net profit was level with the same period last year, but only thanks to non-operating items. The operating result for the quarter was below that of 3Q2012 as RASK growth failed to beat CASK growth for the first time this year. The carrier’s capacity and revenue growth continue at double digit rates, so maybe the occasional stumble is inevitable.
The brightest aspect of the 3Q results was what looks like the beginning of a rebound in cargo activity, which significantly outpaced the passenger business in terms of growth versus last year. Nevertheless, cargo is only 8% of revenues and the passenger operation business continues to be the major driver of the business.
Management will be looking to demonstrate that the weakening of unit revenue growth and strengthening of unit cost growth are not the start of new trends.
Pegasus is demonstrating strong profitability following its IPO in Apr-2013, since when its share price has doubled. It is now among Europe’s more profitable airlines and one of its lowest-cost practitioners. In 3Q2013, the underlying operating result of the core operation increased by 18% compared with last year and this result has more than doubled over the first nine months of the year.
However, net profit fell in 3Q2013 as the weakening Turkish lira led to adverse foreign exchange impacts on the profit and loss statement. In addition, the operating margin declined year-on-year in the quarter as RASK growth was outpaced by CASK growth. It is not time to take any drastic evasive action, but it seems even the more financially robust airlines cannot avoid some turbulence at times.
(updated following 13-Nov-2013 analyst briefing to include additional comments on SIA yields, Scoot and joint venture with Tata)
Singapore Airlines (SIA) has reported higher profits for the three months and fiscal first half ending 30-Sep-2013. But the carrier’s operating margin was once again low, particularly by SIA standards, as it continues to see a drop in yields.
Market conditions for SIA remain unfavourable. Competition in Southeast Asia has been intensifying while the cargo and long-haul passenger markets remain relatively weak. But the group has been trying to position itself for higher growth and profitability over the long term through a series of major strategic changes.
The last of several major strategic initiatives came towards the end of the most recent quarter as SIA unveiled plans to launch a joint venture full-service carrier in India with Tata. The new Indian carrier, which is expected to launch in 2014, follows the 2012 launch of Singapore-based long-haul low-cost carrier Scoot and an acceleration of expansion at regional full-service subsidiary SilkAir. Scoot is not yet profitable and SilkAir has seen its profitability decline in recent months but over the long-run the SIA Group will have a stronger portfolio with a potential for a return of higher profits.
In 3Q2013, IAG continued the turnaround in its operating result that began in 2Q2013. All three of its main brands – British Airways, Iberia and Vueling – saw an increase in their result from the same quarter of 2012. The improvement was mainly driven by healthy unit revenues, although these were diluted by currency effects, and the addition of LCC Vueling in the full quarter for the first time.
It seems that IAG’s prediction that Iberia’s restructuring programme would start to bear fruit in the second half of the year is being proven correct.
Moreover, new FY2013 guidance, for an operating result of around EUR740 million, is ahead of IAG’s previous target, even allowing for the Vueling acquisition. After its 2Q2013 results, we asked if that was a turning point for IAG? At the moment, it would seem that the answer is yes.
Aer Lingus saw operating profit growth in 3Q2013, after a fall in the 1H result. Nevertheless, ongoing yield weakness on short-haul led it to reiterate guidance for lower profits in FY2013 versus FY2012.
The airline's rapid Atlantic capacity expansion has met with some success, but has also provoked a dispute with cabin crew union IMPACT. Assuming this can be resolved and that wet-lease partner ASL proves to be a successful operator, its long-haul niche looks like being a source of growth.
The bigger challenge is on short-haul, where ultra-LCC rival Ryanair is pushing out lower fares in large quantities. It seems that the battle between the two is intensifying just as Ryanair is being directed to sell its 30% stake in Aer Lingus.
Ryanair saw its 1HFY2014 net profit increase, reversing the decline posted in 1Q. Indeed, its 2Q profit was its highest ever quarterly result. The quarter saw an increase in average fares, strong growth in ancillary revenues and a fall in sector length-adjusted costs per passenger. However, Ryanair also gave its second profit warning in two months, a reflection of what it sees as a weak fares outlook across Europe.
For an airline that saw compound average growth in passenger numbers of 18% per annum in the 10 years to FY2013, does planned growth of 2% in FY2014 and 3% in FY2015 mean that opportunities are drying up?
Announcing a return to allocated seating and a host of customer service initiatives and product enhancements, is Ryanair moving away from the purist LCC model?